<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on April 28, 1999
Securities Act File No. 333-19175
Investment Company Act File No. 811-07999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 5 [x]
(Check appropriate box or boxes)
Warburg, Pincus Trust II
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................ ................
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 878-0600
Janna Manes, Esq.
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
.........................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
<PAGE> 2
Approximate Date of Proposed Public Offering: April 30, 1999
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on April 30, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE> 3
PROSPECTUS
April 30, 1999
WARBURG PINCUS TRUST II
- FIXED INCOME PORTFOLIO
- GLOBAL FIXED INCOME PORTFOLIO
Warburg Pincus Trust II shares are not available directly to
individual investors, but may be offered only through certain
insurance products and pension and retirement plans.
As with all mutual funds, the Securities and Exchange Commission
has not approved these securities, nor has it passed upon the
adequacy or accuracy of this Prospectus. It is a criminal
offense to state otherwise.
[Warburg Pincus Asset Management Logo]
<PAGE> 4
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS TRUST II
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to the portfolios of Warburg Pincus
Trust II. Under the terms of the arrangement, no immediate changes are planned
to Warburg Pincus investment portfolio managers and investment professionals.
The Trust's Board of Trustees and portfolio shareholders will be asked to
vote on the "assignment" of the portfolios' current investment advisory
agreements with Warburg Pincus Asset Management. Shareholders will receive more
information about the advisory agreement arrangements, but until then
shareholders do not need to take any action relating to their Warburg Pincus
portfolio shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: April 30, 1999
<PAGE> 5
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................................................. 4
Goals and Principal Strategies........................... 4
Investor Profile......................................... 4
A Word About Risk........................................ 5
PERFORMANCE SUMMARY......................................... 6
Year-by-Year Total Returns............................... 6
Average Annual Total Returns............................. 7
INVESTOR EXPENSES........................................... 8
Fees and Portfolio Expenses.............................. 8
Example.................................................. 8
THE PORTFOLIOS IN DETAIL.................................... 9
The Management Firm...................................... 9
Portfolio Information Key................................ 9
FIXED INCOME PORTFOLIO...................................... 10
GLOBAL FIXED INCOME PORTFOLIO............................... 12
MORE ABOUT RISK............................................. 14
Introduction............................................. 14
Types of Investment Risk................................. 14
Certain Investment Practices............................. 16
MEET THE MANAGERS........................................... 18
ABOUT YOUR ACCOUNT.......................................... 19
Share Valuation.......................................... 19
Distributions............................................ 19
Taxes.................................................... 19
BUYING AND SELLING SHARES................................... 20
FOR MORE INFORMATION........................................ back cover
</TABLE>
3
<PAGE> 6
KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
PORTFOLIO/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
FIXED INCOME PORTFOLIO Total return consistent with prudent - Invests in fixed-income securities
Risk factors: investment management denominated primarily in U.S. dollars
Market risk - Normally maintains a weighted-average
Interest-rate risk portfolio maturity of 10 years or less
Credit risk - Favors investment-grade securities, but
Non-diversified status may diversify credit quality in pursuit of
its goal
GLOBAL FIXED INCOME PORTFOLIO Total return consistent with prudent - Invests in U.S. and foreign fixed-income
Risk factors: investment management, consisting of a securities denominated in various
Market risk combination of interest income, currency currencies
Interest-rate risk gains and capital appreciation - Favors investment-grade securities, but
Credit risk may diversify credit quality in pursuit of
Foreign securities its goal
Non-diversified status - Investment decisions are based on
fundamental market factors, currency
trends and credit quality
</TABLE>
INVESTOR PROFILE
THESE PORTFOLIOS ARE DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- are looking for higher potential returns than money-market funds and are
willing to accept moderate risk and volatility
- want to diversify their investments with fixed-income funds
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your selection of a portfolio on your own goals, risk
preferences and time horizon.
4
<PAGE> 7
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the portfolios are discussed below. Before you
invest, please make sure you understand the risks that apply to your portfolio.
As with any mutual fund, you could lose money over any period of time.
Investments in the portfolios are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
Both portfolios
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
Both portfolios
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
CREDIT RISK
Both portfolios
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
NON-DIVERSIFIED STATUS
Both portfolios
The portfolios are considered non-diversified portfolios under the Investment
Company Act of 1940 and are permitted to invest a greater proportion of their
assets in the securities of a smaller number of issuers. As a result, the
portfolios may be subject to greater volatility with respect to their
investments than a portfolio that is more broadly diversified.
FOREIGN SECURITIES
Global Fixed Income Portfolio
A portfolio that invests outside the U.S. carries additional risks that
include:
- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses. Each of the portfolios
may, but is not required to, seek to reduce currency risk by hedging part
or all of its exposure to various foreign currencies.
- INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
- POLITICAL RISK Foreign governments may expropriate assets, impose capital
controls or punitive taxes, or nationalize a company or industry. Any of
these actions could have a severe effect on security prices and impair a
portfolio's ability to bring its capital or income back to the U.S. Other
political risks include economic-policy changes, social and political
instability, military action and war.
5
<PAGE> 8
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these portfolios. The bar chart shows you each portfolio's
performance for the calendar year ended December 31, 1998. The table compares
each portfolio's performance over time to that of a broadly based securities
market index and other indexes, if applicable. The bar chart and table do not
reflect additional charges and expenses which are, or may be, imposed under the
variable contracts or plans; such charges and expenses are described in the
prospectus of the insurance company separate account or in the plan documents or
other informational materials supplied by plan sponsors. Inclusion of these
charges and expenses would reduce the total return for the periods shown. As
with all mutual funds, past performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1998
<S> <C>
8.08%
</TABLE>
FIXED INCOME PORTFOLIO
Best quarter: 4.56%(Q3 98)
Worst quarter: 0.05%(Q4 98)
Inception date: 3/31/97
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1998
<S> <C>
12.09%
</TABLE>
GLOBAL FIXED INCOME PORTFOLIO
Best quarter: 6.11%(Q3 98)
Worst quarter: 1.24%(Q2 98)
Inception date: 3/31/97
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO 8.08% NA NA 9.76% 3/31/97
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND
INDEX(1) 8.44% NA NA 9.43%
GLOBAL FIXED INCOME PORTFOLIO 12.09% NA NA 8.54% 3/31/97
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX
(CURRENCY-HEDGED)(2) 11.02% NA NA 12.05%
LEHMAN BROTHERS AGGREGATE BOND INDEX(3) 8.69% NA NA 10.88%
COMPOSITE BENCHMARK(4) 8.84% NA NA 10.97%
</TABLE>
(1) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index (with no defined investment objective) of intermediate-term
government and corporate bonds, and is calculated by Lehman Brothers Inc.
(2) The Salomon Brothers World Government Bond Index (Currency-Hedged) is a
market-capitalization-weighted index designed to track major government debt
markets and is currency-hedged into U.S. dollars.
(3) The Lehman Brothers Aggregate Bond Index is composed of the Lehman Brothers
Government/Corporate Bond Index and the Lehman Brothers Mortgage-Backed
Securities Index. The Aggregate Bond Index includes U.S. Treasury and agency
issues, corporate bond issues and mortgage-backed securities rated
investment-grade or higher by Moody's Investors Service, Standard & Poor's
Corporation or Fitch Investors' Service.
(4) The Composite Benchmark measures the weighted performance of three component
indexes. The weights of the component indexes -- 50% Lehman Brothers
Aggregate Bond Index, 35% Salomon Brothers World Government Bond Index
Excluding the U.S. (Currency-Hedged), and 15% Merrill Lynch High Yield
Master II Index -- correspond to the investment strategy of the fund's
managers. The Merrill Lynch High Yield Master II Index provides a
broad-based measure of the performance of the non-investment-grade U.S.
domestic bond market.
UNDERSTANDING PERFORMANCE
- TOTAL RETURN tells you how much an investment in a portfolio has changed
in value over a given time period. It assumes that all dividends and
capital gains (if any) were reinvested in additional shares. The change
in value can be stated either as a cumulative return or as an average
annual rate of return.
- A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
- An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
- Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
7
<PAGE> 10
INVESTOR EXPENSES
FEES AND PORTFOLIO EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
portfolio operating expense figures are for the fiscal year ended December 31,
1998. The table does not reflect additional charges and expenses which are, or
may be, imposed under the variable contracts or plans; such charges and expenses
are described in the prospectus of the insurance company separate account or in
the plan documents or other informational materials supplied by plan sponsors.
<TABLE>
<CAPTION>
<S> <C> <C>
FIXED GLOBAL FIXED
INCOME INCOME
PORTFOLIO PORTFOLIO
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE NONE
DEFERRED SALES CHARGE "LOAD" NONE NONE
SALES CHARGE "LOAD" ON REINVESTED DISTRIBUTIONS NONE NONE
REDEMPTION FEES NONE NONE
EXCHANGE FEES NONE NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(deducted from portfolio assets)
Management fee 0.50% 1.00%
Distribution and service (12b-1) fee NONE NONE
OTHER EXPENSES 4.82% 2.99%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 5.32% 3.99%
</TABLE>
* Actual fees and expenses for the fiscal year ended December 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses for
some portfolios during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
GLOBAL
EXPENSES AFTER FIXED FIXED
WAIVERS AND INCOME INCOME
REIMBURSEMENTS PORTFOLIO PORTFOLIO
<S> <C> <C>
Management fee .20% .20%
Distribution and service (12b-1) fee NONE NONE
OTHER EXPENSES .79% .79%
---- ----
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES .99% .99%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these portfolios with
the cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each portfolio returns 5% annually, expense ratios
remain as listed in the first table above (before fee waivers and expense
reimbursements and credits), and you close your account at the end of each of
the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO $531 $1,588 $2,639 $5,236
GLOBAL FIXED INCOME PORTFOLIO $401 $1,215 $2,046 $4,197
</TABLE>
8
<PAGE> 11
THE PORTFOLIOS IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
- Investment adviser for the portfolios
- Responsible for managing each portfolio's assets according to its goal and
strategies
- A professional investment-advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
- Currently manages approximately $22 billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this Prospectus.
PORTFOLIO INFORMATION KEY
Concise descriptions of each portfolio begin on the next page. Each
description provides the following information:
GOAL AND STRATEGIES
The portfolio's particular investment goal and the strategies it intends to
use in pursuing that goal. Percentages of portfolio assets are based on total
assets unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the portfolio invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the portfolio. Additional risk factors
are included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the
portfolio's day-to-day management.
INVESTOR EXPENSES
Actual portfolio expenses for the 1998 fiscal year. Future expenses may be
higher or lower. Additional expenses are, or may be, imposed under the variable
contracts or plans.
- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the portfolio. Expressed as a percentage of average net
assets after waivers.
- OTHER EXPENSES Fees paid by the portfolio for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets after
waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the portfolio's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the
portfolio, assuming you had reinvested all dividend and capital-gain
distributions.
- PORTFOLIO TURNOVER An indication of trading frequency. The portfolios may
sell securities without regard to the length of time they have been held.
A high turnover rate may increase the portfolio's transaction costs and
negatively affect its performance.
The Annual Report includes the auditor's report, along with the portfolio's
financial statements. It is available free upon request.
9
<PAGE> 12
FIXED INCOME PORTFOLIOS
GOAL AND STRATEGIES
The Fixed Income Portfolio seeks total return consistent with prudent
investment management. To pursue these goals, it invests in fixed-income
securities.
Under normal market conditions:
- at least 65% of the portfolio's fixed-income securities will be investment
grade
- the portfolio will maintain a weighted-average maturity of 10 years or less
PORTFOLIO INVESTMENTS
Under normal market conditions, this portfolio invests at least 65% of assets
in fixed income securities such as:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The portfolio may invest:
- without limit in U.S. dollar-denominated, investment-grade foreign securities
- up to 35% of assets in non-dollar-denominated foreign securities
- up to 35% of assets in fixed-income securities rated below investment grade
(junk bonds)
To a limited extent, the portfolio may also engage in other investment
practices.
RISK FACTORS
This portfolio's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the portfolio.
Compared to a diversified mutual fund, a non-diversified portfolio may invest
a greater portion of its assets in the securities of fewer issuers. Because the
portfolio is non-diversified, its share price and yield might fluctuate more
than they would for a diversified fund.
To the extent that it invests in certain securities, the portfolio may be
affected by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
These risks are defined in "More About Risk." That section also details
certain other investment practices the portfolio may use. Please read "More
About Risk" carefully before you invest.
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the portfolio. You can find out more about
him in "Meet the Managers."
INVESTOR EXPENSES
Management fee .20%
All other expenses .79%
-------------
Total expenses .99%
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
The figures below have been audited by the portfolio's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PERIOD ENDED: 12/98 12/97(1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA
- -----------------------------------------------------------------------------------
Net asset value, beginning of period $9.97 $10.00
- -----------------------------------------------------------------------------------
Investment activities:
Net investment income 0.24 0.44
Net gains or losses on investments and foreign
currency-related items (both realized and unrealized) 0.57 0.45
- -----------------------------------------------------------------------------------
Total from investment activities 0.81 0.89
- -----------------------------------------------------------------------------------
Distributions:
From net investment income (0.24) (0.41)
From excess net investment income (0.04) (0.31)
From realized capital gains (0.18) (0.20)
- -----------------------------------------------------------------------------------
Total distributions (0.46) (0.92)
- -----------------------------------------------------------------------------------
Net asset value, end of period $10.32 $9.97
- -----------------------------------------------------------------------------------
Total return 8.08% 8.96%(2)
- -----------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $2,827 $599
Ratio of expenses to average net assets(3) .99% .99%(4)
Ratio of net income to average net assets 4.69% 12.05%(4)
Decrease reflected in above operating expense ratios due to
waivers/reimbursements 4.33% 5.29%(4)
Portfolio turnover rate 318.95% 138.28%(2)
- -----------------------------------------------------------------------------------
</TABLE>
(1) For the period March 31, 1997 (Commencement of Operations) through December
31, 1997.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements had no effect on the portfolio's
expense ratio.
(4) Annualized.
11
<PAGE> 14
GLOBAL FIXED INCOME PORTFOLIO
GOAL AND STRATEGIES
The Global Fixed Income Portfolio seeks total return consistent with prudent
investment management, consisting of a combination of interest income, currency
gains and capital appreciation. To pursue this goal, the portfolio invests in
fixed-income securities of U.S. and foreign issuers, including
- foreign governments and companies, including those in emerging markets
- multinational organizations such as the World Bank
- the U.S. government, its agencies and instrumentalities
Under normal market conditions, the portfolio invests at least 65% of assets
in fixed-income securities of issuers located in at least three countries,
including the U.S.
The portfolio manager bases his investment decisions on fundamental market
factors, currency trends and credit quality. The portfolio generally invests in
countries where the combination of fixed-income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
manager believes the currency risk can be reduced through hedging.
PORTFOLIO INVESTMENTS
This portfolio may invest in all types of fixed-income securities, including:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The portfolio may purchase securities denominated in foreign currencies or in
U.S. dollars.
The portfolio may invest up to:
- 40% of assets in securities of issuers located in any single foreign country
- 35% of net assets in fixed-income securities rated below investment grade
(junk bonds)
- 25% of assets in the securities of any one foreign government, its agencies,
instrumentalities and political subdivisions
- 35% of assets in equity securities, including common stocks, warrants and
rights
To a limited extent, the portfolio may also engage in other investment
practices.
RISK FACTORS
This portfolio's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- foreign securities
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
either principal or interest to the portfolio.
International investing, particularly in emerging markets, carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Compared to a diversified mutual fund, a non-diversified portfolio may invest
a greater portion of its assets in the securities of fewer issuers. Because the
portfolio is non-diversified, its share price and yield might fluctuate more
than they would for a diversified fund.
To the extent that the portfolio invests in junk bonds, it takes on further
risks that could hurt its performance. "More About Risk" details these and
certain other investment practices the portfolio may use. Please read that
section carefully before you invest.
PORTFOLIO MANAGEMENT
Charles C. Van Vleet manages the portfolio. You can find out more about him
in "Meet the Managers."
INVESTOR EXPENSES
Management fee .20%
All other expenses .79%
----------
Total expenses .99%
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
The figures below have been audited by the portfolio's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
PERIOD ENDED: 12/98 12/97(1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA
- ---------------------------------------------------------------------------------
Net asset value, beginning of period 9.47 $10.00
- ---------------------------------------------------------------------------------
Investment activities:
Net investment income 0.48 0.45
Net gains or losses on investments and foreign
currency-related items (both realized and unrealized) 0.66 (0.15)
- ---------------------------------------------------------------------------------
Total from investment activities 1.14 0.30
- ---------------------------------------------------------------------------------
Distributions:
From net investment income (0.48) (0.44)
In excess of net investment income (0.06) (0.11)
From realized gains (0.01) (0.07)
In excess of realized gains (0.18) (0.21)
- ---------------------------------------------------------------------------------
Total distributions (0.73) (0.83)
- ---------------------------------------------------------------------------------
Net asset value, end of period $9.88 $9.47
- ---------------------------------------------------------------------------------
Total return 12.09% 2.62%(2)
- ---------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $1,790 $1,596
Ratio of expenses to average net assets(3) .99% .99%(4)
Ratio of net income to average net assets 4.84% 5.67%(4)
Decrease reflected in above expense ratios due to
waivers/reimbursements 3.00% 4.59%(4)
Portfolio turnover rate 232.58% 139.81%(2)
- ---------------------------------------------------------------------------------
</TABLE>
(1) For the period March 31, 1997 (Commencement of Operations) through December
31, 1997.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements had no effect on the portfolio's
net expense ratio.
(4) Annualized.
13
<PAGE> 16
MORE ABOUT RISK
INTRODUCTION
A portfolio's goal and principal strategies largely determine its risk
profile. You will find a concise description of each portfolio's risk profile in
"Key Points." The preceding discussions of each portfolio contain more detailed
information. This section discusses other risks that may affect the portfolios.
The portfolios may use certain investment practices that have higher risks
associated with them. However, each portfolio has limitations and policies
designed to reduce many of the risks. The "Certain Investment Practices" table
describes these practices and the limitations on their use.
Each portfolio offers its shares to (i) insurance company separate accounts
that fund both variable contracts and variable life insurance contracts and (ii)
tax-qualified pension and retirement plans including participant-directed plans
which elect to make a portfolio an investment option for plan participants. Due
to differences of tax treatment and other considerations, the interests of
various variable contract owners and plan participants participating in a
portfolio may conflict. The Board of Trustees will monitor the portfolios for
any material conflicts that may arise and will determine what action, if any,
should be taken. If a conflict occurs, the Board may require one or more
insurance company separate accounts and/or plans to withdraw its investments in
one or all portfolios, which may cause a portfolio to sell securities at
disadvantageous prices and disrupt orderly portfolio management. The Board also
may refuse to sell shares of a portfolio to any variable contract or plan or may
suspend or terminate the offering of shares of a portfolio if such action is
required by law or regulatory authority or is in the best interests of the
shareholders of the portfolio.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this Prospectus.
ACCESS RISK Some countries may restrict a portfolio's access to investments
or offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to a portfolio.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-
currency-denominated investments and may widen any losses.
EURO CONVERSION The introduction of a new single European currency, the euro,
may result in uncertainties for securities of European companies, European
markets and the operation of the portfolios. The euro was introduced on January
1, 1999, by 11 European Union member countries who are participating in European
Monetary Union (EMU).
The introduction of the euro results in the redenomination of certain
European debt and equity securities over a period of time, which may bring
differences in various accounting, tax and/or legal treatments that would not
otherwise occur. Any market disruptions relating to the introduction of the euro
could adversely affect the value of European securities and currencies held by
the portfolios. Other risks relate to the ability of financial institutions'
systems to process euro transactions. Additional economic and operational issues
are raised by the fact that certain European Union member countries, including
the United Kingdom, did not participate in EMU on January 1, 1999, and therefore
did not implement the euro on that date.
At this early stage no one knows what the degree of impact of the
introduction of the euro will be. To the extent that the market impact or effect
on a portfolio holding is negative or portfolio service-provider systems cannot
process the euro conversion, the portfolio's performance could be hurt.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a portfolio
could gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the portfolio is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
14
<PAGE> 17
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain portfolio securities may be difficult or impossible to
sell at the time and the price that the portfolio would like. A portfolio may
have to lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on portfolio management
or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
portfolio to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair a
portfolio's ability to bring its capital or income back to the U.S. Other
political risks include economic policy changes, social and political
instability, military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, a portfolio would
generally have to reinvest the proceeds at lower rates.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a portfolio security.
YEAR 2000 PROCESSING RISK The portfolios' investment adviser is working to
address the Year 2000 issue relating to the change from "99" to "00" on January
1, 2000, and has obtained assurances from major service providers that they are
taking similar steps. The adviser is working on the Year 2000 issue pursuant to
a plan designed to address potential problems, and progress is proceeding
according to the plan. The adviser anticipates the completion of testing of
internal systems in the first part of 1999, and is developing contingency plans
intended to address any unexpected service problems.
The portfolios' operations are dependent upon interactions among many
participants in the financial services and other related industries. There is no
assurance that preparations by the adviser and other industry participants will
be sufficient, and any noncompliant computer systems could hurt key portfolio
operations, such as shareholder servicing, pricing and trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world--including companies or
governmental entities in which the portfolios invest and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a portfolio holding or on markets or
economies is negative, it could seriously affect a portfolio's performance.
15
<PAGE> 18
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[-] Permitted without limitation; does not indicate actual use
20% Italic type (e.g., 20%) represents an investment limitation as a percentage of NET
portfolio assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a percentage of TOTAL
portfolio assets; does not indicate actual use
[ ] Permitted, but not expected to be used to a significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
FIXED FIXED
INCOME INCOME
PORTFOLIO PORTFOLIO
INVESTMENT PRACTICE LIMIT
<S> <C> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30%
- ----------------------------------------------------------------------------
CURRENCY HEDGING Instruments, such as options, futures,
forwards or swaps, intended to manage portfolio exposure to
currency risk. Options, futures or forwards involve the
right or obligation to buy or sell a given amount of foreign
currency at a specified price and future date. Swaps involve
the right or obligation to receive or make payments based on
two different currency rates. Correlation, credit, currency,
hedged exposure, liquidity, political, valuation risks.(1) [ ] [ ]
- ----------------------------------------------------------------------------
EMERGING MARKETS Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject a
portfolio to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose a portfolio to risks beyond those generally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. 35% [-]
- ----------------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, euro conversion,
information, liquidity, market, operational, political,
valuation risks. 35% [-]
- ----------------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable a portfolio to hedge against or speculate on
future changes in currency values, interest rates or stock
indexes. Futures obligate the portfolio (or give it the
right, in the case of options) to receive or make payment at
a specific future time based on those future changes.(1)
Correlation, currency, hedged exposure, interest-rate,
market, speculative exposure risks.(2) [ ] [ ]
- ----------------------------------------------------------------------------
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Debt securities
backed by pools of mortgages, including passthrough
certificates and other senior classes of collateralized
mortgage obligations (CMOs) or other receivables. Credit,
extension, interest-rate, liquidity, prepayment risks. [-] [-]
- ----------------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities and
convertible securities rated below the fourth-highest grade
(BBB/Baa) by Standard & Poor's or Moody's rating service,
and unrated securities of comparable quality. Commonly
referred to as junk bonds. Credit, information, interest-
rate, liquidity, market, valuation risks. 35% 35%
- ----------------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security or an index of securities
at a fixed price within a certain time period. A portfolio
may purchase or sell (write) both put and call options for
hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure,
valuation risks. 25% 25%
- ----------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15% 15%
- ----------------------------------------------------------------------------
SECURITIES LENDING Lending portfolio securities to financial
institutions; a portfolio receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3% 33 1/3%
- ----------------------------------------------------------------------------
SHORT SALES "AGAINST THE BOX" A short sale when the
portfolio owns enough shares of the security involved to
cover the borrowed securities, if necessary. Liquidity,
market, speculative exposure risks. 10% 10%
- ----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
GLOBAL
FIXED FIXED
INCOME INCOME
PORTFOLIO PORTFOLIO
INVESTMENT PRACTICE LIMIT
<S> <C> <C>
START-UP AND OTHER SMALL COMPANIES Companies with small
relative market capitalizations, including those with
continuous operations of less than three years. Information
liquidity, market, valuation risks. [-] [-]
- ----------------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and
other instruments that allow a portfolio to gain access to
the performance of a benchmark asset (such as an index or
selected stocks or currency or interest rates) that may be
more attractive or accessible than the portfolio's direct
investment. Credit, currency, information, interest-rate,
liquidity, market, political, speculative exposure,
valuation risks. [ ] [ ]
- ----------------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of a
portfolio's assets in investments such as money-market
obligations and investment-grade debt securities for
defensive purposes. Although intended to avoid losses in
adverse market, economic, political or other conditions,
defensive tactics might be inconsistent with a portfolio's
principal investment strategies and might prevent a
portfolio from achieving its goal. [ ] [ ]
- ----------------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. 10% 10%
- ----------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. 20% 20%
- ----------------------------------------------------------------------------
</TABLE>
(1) The portfolios are not obligated to pursue any hedging strategy. In
addition, hedging practices may not be available, may be too costly to be
used effectively or may be unable to be used for other reasons.
(2) Each portfolio is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
17
<PAGE> 20
MEET THE MANAGERS
[VAN DAALEN PHOTO]
M. ANTHONY E. VAN DAALEN, CFA
Senior Vice President
- Portfolio Manager, Fixed Income Portfolio since inception
- With Warburg Pincus since 1992
[VAN VLEET PHOTO]
CHARLES C. VAN VLEET
Vice President
- Portfolio Manager, Global Fixed Income Portfolio since May 1998
- With Warburg Pincus since 1998
- Senior vice president and senior global strategist with Putnam Investment
Management, 1994 to 1998
- Previously vice president and senior portfolio manager at Alliance Capital in
New York and Alliance Limited in London, 1989 to 1994
Job titles indicate position with the investment adviser.
18
<PAGE> 21
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing each portfolio's total assets, less its
liabilities, by the number of shares outstanding in the portfolio.
Each portfolio values its securities based on market quotations when it
calculates its NAV. If market quotations are not readily available, securities
and other assets are valued by another method that the Board of Trustees
believes accurately reflects fair value. Debt obligations that will mature in 60
days or less are valued on the basis of amortized cost, unless the Board
determines that using this method would not reflect an investment's value.
Some portfolio securities may be listed on foreign exchanges that are open on
days (such as U.S. holidays) when the portfolios do not compute their prices.
This could cause the value of a portfolio's investments to be affected by
trading on days when you cannot buy or sell shares.
DISTRIBUTIONS
Investors in a portfolio are entitled to a share of the portfolio's net
income and gains on investments. The portfolio passes these earnings along to
its shareholders as distributions.
Each portfolio earns dividends from stocks and interest from bond,
money-market and other investments. These are passed along as dividend
distributions. A portfolio realizes capital gains whenever it sells securities
for a higher price than it paid for them. These are passed along as capital-gain
distributions.
The portfolios typically distribute dividends and capital gains annually,
usually in December. Distributions will be reinvested automatically in
additional shares of the same portfolio that paid them.
TAXES
For a discussion of the tax status of a variable contract or pension plan,
refer to the prospectus of the sponsoring participating insurance company
separate account or plan documents or other informational materials supplied by
plan sponsors.
Because shares of the portfolios may be purchased only through variable
contracts and plans, income dividends or capital-gain distributions from a
portfolio are taxable, if at all, to the participating insurance companies and
plans and will be exempt from current taxation of the variable-contract owner or
plan participant if left to accumulate within the variable contract or plan.
Each portfolio intends to comply with the diversification requirements
currently imposed by the Internal Revenue Service on separate accounts of
insurance companies as a condition of maintaining the tax-deferred status of
variable contracts.
19
<PAGE> 22
BUYING AND SELLING SHARES
You may not buy or sell shares of a portfolio directly; you may only buy or
sell shares through variable-annuity contracts and variable life insurance
contracts offered by separate accounts of certain insurance companies or through
tax-qualified pension and retirement plans. Certain portfolios may not be
available in connection with a particular contract or plan.
An insurance company's separate accounts buy and sell shares of a portfolio
at NAV, without any sales or other charges. Each insurance company receives
orders from its contract holders to buy or sell shares of a portfolio on any
business day that the portfolio calculates its NAV. If the order is received by
the insurance company prior to the close of regular trading on the NYSE, the
order will be executed at that day's NAV.
Plan participants may buy shares of a portfolio through their plan by
directing the plan trustee to buy shares for their account in a manner similar
to that described above for variable annuity and variable life insurance
contracts. You should contact your plan sponsor concerning the appropriate
procedure for investing in a portfolio.
Each portfolio reserves the right to:
- refuse any specific purchase or exchange request, including those from any
person or group who, in the portfolio's view, is likely to engage in excessive
trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt portfolio
operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- stop offering the portfolio's shares for a period of time (such as when
management believes that a substantial increase in assets could adversely
affect it)
20
<PAGE> 23
FOR MORE INFORMATION
This Prospectus is intended for use in connection with certain insurance
products and pension and retirement plans. Please refer to the prospectus of the
sponsoring participating insurance company separate account or to the plan
documents or other informational materials supplied by plan sponsors for
information regarding distributions and instructions on purchasing or selling a
variable contract and on how to select a portfolio as an investment option for a
variable contract or plan. More information about these portfolios is available
free upon request, including the following:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the portfolio manager
discussing market conditions and investment strategies that significantly
affected portfolio performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the portfolios, is on file with the Securities and Exchange
Commission (SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
Please contact Warburg Pincus to obtain, without charge, the SAI and Annual
and Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-222-8977
BY MAIL:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBER:
Warburg Pincus Trust II 811-07999
[WARBURG PINCUS LOGO]
ASSET MANAGEMENT
P.O. BOX 9030, BOSTON, MA 02205-9030
800-222-8977 - www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRBDF-1-0499
<PAGE> 24
PROSPECTUS
April 30, 1999
WARBURG PINCUS TRUST II
- FIXED INCOME PORTFOLIO
Warburg Pincus Trust II shares are not available directly to
individual investors, but may be offered only through certain
insurance products and pension and retirement plans.
As with all mutual funds, the Securities and Exchange Commission
has not approved these securities, nor has it passed upon the
adequacy or accuracy of this Prospectus. It is a criminal
offense to state otherwise.
[WARBURG PINCUS LOGO]
<PAGE> 25
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
WARBURG PINCUS TRUST II
On February 15, 1999, Warburg Pincus and Credit Suisse Group announced that
they reached an agreement for Credit Suisse to acquire Warburg Pincus Asset
Management, Inc., the investment adviser to the portfolios of Warburg Pincus
Trust II. Under the terms of the arrangement, no immediate changes are planned
to Warburg Pincus investment portfolio managers and investment professionals.
The Trust's Board of Trustees and portfolio shareholders will be asked to
vote on the "assignment" of the portfolio's current investment advisory
agreement with Warburg Pincus Asset Management. Shareholders will receive more
information about the advisory agreement arrangements, but until then
shareholders do not need to take any action relating to their Warburg Pincus
portfolio shares.
The transaction is expected to be complete in mid-1999 upon satisfaction of
the various conditions in the agreement.
Date: April 30, 1999
<PAGE> 26
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................................................. 4
Goal and Principal Strategies............................ 4
Investor Profile......................................... 4
A Word About Risk........................................ 5
PERFORMANCE SUMMARY......................................... 6
Year-by-Year Total Returns............................... 6
Average Annual Total Returns............................. 7
INVESTOR EXPENSES........................................... 8
Fees and Portfolio Expenses.............................. 8
Example.................................................. 8
THE PORTFOLIO IN DETAIL..................................... 9
The Management Firm...................................... 9
Portfolio Information Key................................ 9
Goal and Strategies...................................... 10
Portfolio Investments.................................... 10
Risk Factors............................................. 10
Portfolio Management..................................... 10
Investor Expenses........................................ 10
MORE ABOUT RISK............................................. 12
Introduction............................................. 12
Types of Investment Risk................................. 12
Certain Investment Practices............................. 14
MEET THE MANAGER............................................ 16
ABOUT YOUR ACCOUNT.......................................... 17
Share Valuation.......................................... 17
Distributions............................................ 17
Taxes.................................................... 17
BUYING AND SELLING SHARES................................... 18
FOR MORE INFORMATION........................................ back cover
</TABLE>
3
<PAGE> 27
KEY POINTS
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
PORTFOLIO/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
FIXED INCOME PORTFOLIO Total return consistent with prudent - Invests in fixed-income securities
Risk factors: investment management denominated primarily in U.S. dollars
Market risk - Normally maintains a weighted-average
Interest-rate risk portfolio maturity of 10 years or less
Credit risk - Favors investment-grade securities, but
Non-diversified status may diversify credit quality in pursuit of
its goal
</TABLE>
INVESTOR PROFILE
THIS PORTFOLIO IS DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- are looking for higher potential returns than money-market funds and are
willing to accept moderate risk and volatility
- want to diversify their investments with a fixed-income fund
IT MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your investment decision on your own goals, risk preferences
and time horizon.
4
<PAGE> 28
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the portfolio are discussed below. Before you
invest, please make sure you understand the risks that apply to the portfolio.
As with any mutual fund, you could lose money over any period of time.
Investments in the portfolio are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
CREDIT RISK
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
NON-DIVERSIFIED STATUS
The portfolio is considered a non-diversified portfolio under the Investment
Company Act of 1940 and is permitted to invest a greater proportion of its
assets in the securities of a smaller number of issuers. As a result, the
portfolio may be subject to greater volatility with respect to its investments
than a portfolio that is more broadly diversified.
5
<PAGE> 29
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in this portfolio. The bar chart shows you the portfolio's
performance for the calendar year ended December 31, 1998. The table compares
the portfolio's performance over time to that of a broadly based securities
market index. The bar chart and table do not reflect additional charges and
expenses which are, or may be, imposed under the variable contracts or plans;
such charges and expenses are described in the prospectus of the insurance
company separate account or in the plan documents or other informational
materials supplied by plan sponsors. Inclusion of these charges and expenses
would reduce the total return for the periods shown. As with all mutual funds,
past performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
[Total Returns Performance Graphic]
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1998
<S> <C> <C>
FIXED INCOME PORTFOLIO
8.08%
Best quarter: 4.56% (Q3 98)
Worst quarter: 0.05% (Q4 98)
Inception date: 3/31/97
</TABLE>
6
<PAGE> 30
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1994-1998 1989-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO 8.08% NA NA 9.76% 3/31/97
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND
INDEX(*) 8.44% NA NA 9.43%
</TABLE>
(*) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index (with no defined investment objective) of intermediate-term
government and corporate bonds, and is calculated by Lehman Brothers Inc.
UNDERSTANDING PERFORMANCE
- TOTAL RETURN tells you how much an investment in the portfolio has
changed in value over a given time period. It assumes that all dividends
and capital gains (if any) were reinvested in additional shares. The
change in value can be stated either as a cumulative return or as an
average annual rate of return.
- A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
- An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
- Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
7
<PAGE> 31
INVESTOR EXPENSES
FEES AND PORTFOLIO EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
portfolio operating expense figures are for the fiscal year ended December 31,
1998. The table does not reflect additional charges and expenses which are, or
may be, imposed under the variable contracts or plans; such charges and expenses
are described in the prospectus of the insurance company separate account or in
the plan documents or other informational materials supplied by plan sponsors.
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE
DEFERRED SALES CHARGE "LOAD" NONE
SALES CHARGE "LOAD" ON REINVESTED DISTRIBUTIONS NONE
REDEMPTION FEES NONE
EXCHANGE FEES NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(deducted from portfolio assets)
Management fee 0.50%
Distribution and service (12b-1) fee NONE
OTHER EXPENSES 4.82%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 5.32%
</TABLE>
* Actual fees and expenses for the fiscal year ended December 31, 1998 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses for
the portfolio during 1998 but may be discontinued at any time.
<TABLE>
<CAPTION>
EXPENSES AFTER
WAIVERS AND
REIMBURSEMENTS
<S> <C>
Management fee .20%
Distribution and service (12b-1) fee NONE
OTHER EXPENSES .79%
----
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES .99%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, the portfolio returns 5% annually, expense ratios
remain as listed in the first table above (before fee waivers and expense
reimbursements and credits), and you close your account at the end of each of
the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C>
$531 $1,588 $2,639 $5,236
</TABLE>
8
<PAGE> 32
THE PORTFOLIO IN DETAIL
THE MANAGEMENT FIRM
WARBURG PINCUS ASSET MANAGEMENT, INC.
466 Lexington Avenue
New York, NY 10017-3147
- Investment adviser for the portfolio
- Responsible for managing the portfolio's assets according to its goal and
strategies
- A professional investment-advisory firm providing investment services to
individuals since 1970 and to institutions since 1973
- Currently manages approximately $22 billion in assets
For easier reading, Warburg Pincus Asset Management, Inc. will be referred to
as "Warburg Pincus" or "we" throughout this Prospectus.
PORTFOLIO INFORMATION KEY
A concise description of the portfolio begins on the next page. The
description provides the following information:
GOAL AND STRATEGIES
The portfolio's particular investment goal and the strategies it intends to
use in pursuing that goal. Percentages of portfolio assets are based on total
assets unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the portfolio invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the portfolio. Additional risk factors
are included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the
portfolio's day-to-day management.
INVESTOR EXPENSES
Actual portfolio expenses for the 1998 fiscal year. Future expenses may be
higher or lower. Additional expenses are, or may be, imposed under the variable
contracts or plans.
- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the portfolio. Expressed as a percentage of average net
assets after waivers.
- OTHER EXPENSES Fees paid by the portfolio for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets after
waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the portfolio's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the
portfolio, assuming you had reinvested all dividend and capital-gain
distributions.
- PORTFOLIO TURNOVER An indication of trading frequency.
The portfolio may sell securities without regard to the length of time they
have been held. A high turnover rate may increase the portfolio's transaction
costs and negatively affect its performance.
The Annual Report includes the auditor's report, along with the portfolio's
financial statements. It is available free upon request.
9
<PAGE> 33
GOAL AND STRATEGIES
The portfolio seeks total return consistent with prudent investment
management. To pursue these goals, it invests in fixed-income securities.
Under normal market conditions:
- at least 65% of the portfolio's fixed-income securities will be investment
grade
- the portfolio will maintain a weighted-average maturity of 10 years or less
PORTFOLIO INVESTMENTS
Under normal market conditions, the portfolio invests at least 65% of assets
in fixed income securities such as:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The portfolio may invest:
- without limit in U.S. dollar-denominated, investment-grade foreign securities
- up to 35% of assets in non-dollar-denominated foreign securities
- up to 35% of assets in fixed-income securities rated below investment grade
(junk bonds)
To a limited extent, the portfolio may also engage in other investment
practices.
RISK FACTORS
This portfolio's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the portfolio.
Compared to a diversified mutual fund, a non-diversified portfolio may invest
a greater portion of its assets in the securities of fewer issuers. Because the
portfolio is non-diversified, its share price and yield might fluctuate more
than they would for a diversified fund.
To the extent that it invests in certain securities, the portfolio may be
affected by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
These risks are defined in "More About Risk." That section also details
certain other investment practices the portfolio may use. Please read "More
About Risk" carefully before you invest.
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the portfolio. You can find out more about
him in "Meet the Manager."
INVESTOR EXPENSES
Management fee .20%
All other expenses .79%
-------------
Total expenses .99%
10
<PAGE> 34
FINANCIAL HIGHLIGHTS
The figures below have been audited by the portfolio's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 12/98 12/97(1)
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $9.97 $10.00
Investment activities:
Net investment income 0.24 0.44
Net gains or losses on investments and foreign
currency-related items (both realized and unrealized) 0.57 0.45
Total from investment activities 0.81 0.89
Distributions:
From net investment income (0.24) (0.41)
From excess net investment income (0.04) (0.31)
From realized capital gains (0.18) (0.20)
Total distributions (0.46) (0.92)
Net asset value, end of period $10.32 $9.97
Total return 8.08% 8.96%(2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $2,827 $599
Ratio of expenses to average net assets(3) .99% .99%(4)
Ratio of net income to average net assets 4.69% 12.05%(4)
Decrease reflected in above operating expense ratios due to
waivers/reimbursements 4.33% 5.29%(4)
Portfolio turnover rate 318.95% 138.28%(2)
</TABLE>
(1) For the period March 31, 1997 (Commencement of Operations) through December
31, 1997.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements had no effect on the portfolio's
expense ratio.
(4) Annualized.
11
<PAGE> 35
MORE ABOUT RISK
INTRODUCTION
The portfolio's goal and principal strategies largely determine its risk
profile. You will find a concise description of the portfolio's risk profile in
"Key Points." The preceding discussion of the portfolio contains more detailed
information. This section discusses other risks that may affect the portfolio.
The portfolio may use certain investment practices that have higher risks
associated with them. However, the portfolio has limitations and policies
designed to reduce many of the risks. The "Certain Investment Practices" table
describes these practices and the limitations on their use.
The portfolio offers its shares to (i) insurance company separate accounts
that fund both variable contracts and variable life insurance contracts and (ii)
tax-qualified pension and retirement plans including participant-directed plans
which elect to make the portfolio an investment option for plan participants.
Due to differences of tax treatment and other considerations, the interests of
various variable contract owners and plan participants participating in the
portfolio may conflict. The Board of Trustees will monitor the portfolio for any
material conflicts that may arise and will determine what action, if any, should
be taken. If a conflict occurs, the Board may require one or more insurance
company separate accounts and/or plans to withdraw its investments in the
portfolio, which may cause the portfolio to sell securities at disadvantageous
prices and disrupt orderly portfolio management. The Board also may refuse to
sell shares of the portfolio to any variable contract or plan or may suspend or
terminate the offering of shares of the portfolio if such action is required by
law or regulatory authority or is in the best interests of the shareholders of
the portfolio.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this Prospectus.
ACCESS RISK Some countries may restrict the portfolio's access to investments
or offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to the portfolio.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-
currency-denominated investments and may widen any losses.
EURO CONVERSION The introduction of a new single European currency, the euro,
may result in uncertainties for securities of European companies, European
markets and the operation of the portfolio. The euro was introduced on January
1, 1999, by 11 European Union member countries who are participating in European
Monetary Union (EMU).
The introduction of the euro results in the redenomination of certain
European debt and equity securities over a period of time, which may bring
differences in various accounting, tax and/or legal treatments that would not
otherwise occur. Any market disruptions relating to the introduction of the euro
could adversely affect the value of European securities and currencies held by
the portfolio. Other risks relate to the ability of financial institutions'
systems to process euro transactions. Additional economic and operational issues
are raised by the fact that certain European Union member countries, including
the United Kingdom, did not participate in EMU on January 1, 1999, and therefore
did not implement the euro on that date.
At this early stage no one knows what the degree of impact of the
introduction of the euro will be. To the extent that the market impact or effect
on a portfolio holding is negative or portfolio service-provider systems cannot
process the euro conversion, the portfolio's performance could be hurt.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money the
portfolio could gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can
reduce or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the portfolio is directly exposed to its risks. Gains or losses
from speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
12
<PAGE> 36
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain portfolio securities may be difficult or impossible to
sell at the time and the price that the portfolio would like. The portfolio may
have to lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on portfolio management
or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject the
portfolio to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair
the portfolio's ability to bring its capital or income back to the U.S. Other
political risks include economic policy changes, social and political
instability, military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, the portfolio would
generally have to reinvest the proceeds at lower rates.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a portfolio security.
YEAR 2000 PROCESSING RISK The portfolio's investment adviser is working to
address the Year 2000 issue relating to the change from "99" to "00" on January
1, 2000, and has obtained assurances from major service providers that they are
taking similar steps. The adviser is working on the Year 2000 issue pursuant to
a plan designed to address potential problems, and progress is proceeding
according to the plan. The adviser anticipates the completion of testing of
internal systems in the first part of 1999, and is developing contingency plans
intended to address any unexpected service problems.
The portfolio's operations are dependent upon interactions among many
participants in the financial services and other related industries. There is no
assurance that preparations by the adviser and other industry participants will
be sufficient, and any noncompliant computer systems could hurt key portfolio
operations, such as shareholder servicing, pricing and trading.
The Year 2000 issue affects practically all companies, organizations,
governments, markets and economies throughout the world--including companies or
governmental entities in which the portfolio invests and markets in which they
trade. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the impact on a portfolio holding or on markets or
economies is negative, it could seriously affect the portfolio's performance.
13
<PAGE> 37
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[-] Permitted without limitation; does not indicate actual use
20% Italic type (e.g., 20%) represents an investment limitation as a percentage of NET
portfolio assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a percentage of TOTAL
portfolio assets; does not indicate actual use
[ ] Permitted, but not expected to be used to a significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT PRACTICE LIMIT
<S> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30%
- ---------------------------------------------------------------------
CURRENCY HEDGING Instruments, such as options, futures,
forwards or swaps, intended to manage portfolio exposure to
currency risk. Options, futures or forwards involve the
right or obligation to buy or sell a given amount of foreign
currency at a specified price and future date. Swaps involve
the right or obligation to receive or make payments based on
two different currency rates. Correlation, credit, currency,
hedged exposure, liquidity, political, valuation risks.(1) [ ]
- ---------------------------------------------------------------------
EMERGING MARKETS Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject the
portfolio to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose the portfolio to risks beyond those generally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. 35%
- ---------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, euro conversion,
information, liquidity, market, operational, political,
valuation risks. 35%
- ---------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable the portfolio to hedge against or speculate on
future changes in currency values, interest rates or stock
indexes. Futures obligate the portfolio (or give it the
right, in the case of options) to receive or make payment at
a specific future time based on those future changes.(1)
Correlation, currency, hedged exposure, interest-rate,
market, speculative exposure risks.(2) [ ]
- ---------------------------------------------------------------------
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Debt securities
backed by pools of mortgages, including passthrough
certificates and other senior classes of collateralized
mortgage obligations (CMOs) or other receivables. Credit,
extension, interest-rate, liquidity, prepayment risks. [-]
- ---------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities and
convertible securities rated below the fourth-highest grade
(BBB/Baa) by Standard & Poor's or Moody's rating service,
and unrated securities of comparable quality. Commonly
referred to as junk bonds. Credit, information,
interest-rate, liquidity, market, valuation risks. 35%
- ---------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security or an index of securities
at a fixed price within a certain time period. The portfolio
may purchase or sell (write) both put and call options for
hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure,
valuation risks. 25%
- ---------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15%
- ---------------------------------------------------------------------
SECURITIES LENDING Lending portfolio securities to financial
institutions; the portfolio receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3%
- ---------------------------------------------------------------------
SHORT SALES "AGAINST THE BOX" A short sale when the
portfolio owns enough shares of the security involved to
cover the borrowed securities, if necessary. Liquidity,
market, speculative exposure risks. 10%
- ---------------------------------------------------------------------
</TABLE>
14
<PAGE> 38
<TABLE>
<CAPTION>
INVESTMENT PRACTICE LIMIT
<S> <C>
START-UP AND OTHER SMALL COMPANIES Companies with small
relative market capitalizations, including those with
continuous operations of less than three years. Information
liquidity, market, valuation risks. [-]
- ---------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and
other instruments that allow the portfolio to gain access to
the performance of a benchmark asset (such as an index or
selected stocks or currency or interest rates) that may be
more attractive or accessible than the portfolio's direct
investment. Credit, currency, information, interest-rate,
liquidity, market, political, speculative exposure,
valuation risks. [ ]
- ---------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of the
portfolio's assets in investments such as money-market
obligations and investment-grade debt securities for
defensive purposes. Although intended to avoid losses in
adverse market, economic, political or other conditions,
defensive tactics might be inconsistent with the portfolio's
principal investment strategies and might prevent the
portfolio from achieving its goal. [ ]
- ---------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. 10%
- ---------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. 20%
- ---------------------------------------------------------------------
</TABLE>
(1) The portfolio is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) The portfolio is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
15
<PAGE> 39
MEET THE MANAGER
[VAN DAALEN PHOTO]
M. ANTHONY E. VAN DAALEN, CFA
Senior Vice President
- Portfolio Manager, Fixed Income Portfolio since inception
- With Warburg Pincus since 1992
Job title indicates position with the investment adviser.
16
<PAGE> 40
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the portfolio's total assets, less its
liabilities, by the number of shares outstanding.
The portfolio values its securities based on market quotations when it
calculates its NAV. If market quotations are not readily available, securities
and other assets are valued by another method that the Board of Trustees
believes accurately reflects fair value. Debt obligations that will mature in 60
days or less are valued on the basis of amortized cost, unless the Board
determines that using this method would not reflect an investment's value.
Some portfolio securities may be listed on foreign exchanges that are open on
days (such as U.S. holidays) when the portfolio does not compute its price. This
could cause the value of the portfolio's investments to be affected by trading
on days when you cannot buy or sell shares.
DISTRIBUTIONS
Investors in the portfolio are entitled to a share of the portfolio's net
income and gains on investments. The portfolio passes these earnings along to
its shareholders as distributions.
The portfolio earns dividends from stocks and interest from bond,
money-market and other investments. These are passed along as dividend
distributions. The portfolio realizes capital gains whenever it sells securities
for a higher price than it paid for them. These are passed along as capital-gain
distributions.
The portfolio typically distributes dividends and capital gains annually,
usually in December. Distributions will be reinvested automatically in
additional shares of the portfolio.
TAXES
For a discussion of the tax status of a variable contract or pension plan,
refer to the prospectus of the sponsoring participating insurance company
separate account or plan documents or other informational materials supplied by
plan sponsors.
Because shares of the portfolio may be purchased only through variable
contracts and plans, income dividends or capital-gain distributions from the
portfolio are taxable, if at all, to the participating insurance companies and
plans and will be exempt from current taxation of the variable-contract owner or
plan participant if left to accumulate within the variable contract or plan.
The portfolio intends to comply with the diversification requirements
currently imposed by the Internal Revenue Service on separate accounts of
insurance companies as a condition of maintaining the tax-deferred status of
variable contracts.
17
<PAGE> 41
BUYING AND SELLING SHARES
You may not buy or sell shares of the portfolio directly; you may only buy or
sell shares through variable-annuity contracts and variable life insurance
contracts offered by separate accounts of certain insurance companies or through
tax-qualified pension and retirement plans. The portfolio may not be available
in connection with a particular contract or plan.
An insurance company's separate accounts buy and sell shares of the portfolio
at NAV, without any sales or other charges. Each insurance company receives
orders from its contract holders to buy or sell shares of the portfolio on any
business day that the portfolio calculates its NAV. If the order is received by
the insurance company prior to the close of regular trading on the NYSE, the
order will be executed at that day's NAV.
Plan participants may buy shares of the portfolio through their plan by
directing the plan trustee to buy shares for their account in a manner similar
to that described above for variable annuity and variable life insurance
contracts. You should contact your plan sponsor concerning the appropriate
procedure for investing in the portfolio.
The portfolio reserves the right to:
- refuse any specific purchase or exchange request, including those from any
person or group who, in the portfolio's view, is likely to engage in
excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt portfolio
operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- stop offering the portfolio's shares for a period of time (such as when
management believes that a substantial increase in assets could adversely
affect it)
18
<PAGE> 42
FOR MORE INFORMATION
This Prospectus is intended for use in connection with certain insurance
products and pension and retirement plans. Please refer to the prospectus of the
sponsoring participating insurance company separate account or to the plan
documents or other informational materials supplied by plan sponsors for
information regarding distributions and instructions on purchasing or selling a
variable contract and on how to select a portfolio as an investment option for a
variable contract or plan. More information about the portfolio is available
free upon request, including the following:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the portfolio manager
discussing market conditions and investment strategies that significantly
affected portfolio performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the portfolio, is on file with the Securities and Exchange
Commission (SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
Please contact Warburg Pincus to obtain, without charge, the SAI and Annual
and Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-222-8977
BY MAIL:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus
2 Heritage Drive
North Quincy, MA 02171
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBER:
Warburg Pincus Trust II 811-07999
[WARBURG PINCUS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-222-8977 - www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. TRFIX-1-0499
<PAGE> 43
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
This Statement of Additional Information provides information about Warburg
Pincus Trust II (the "Trust"), relating to the Fixed Income and Global Fixed
Income Portfolios (each a "Portfolio," and together, the "Portfolios") that
supplements information contained in the Prospectus or Prospectuses for the
relevant Portfolio (collectively, the "Prospectuses"), each dated April 30,
1999.
The Trust's audited Annual Reports dated December 31, 1998, which either
accompany this Statement of Additional Information or have previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a Prospectus, no
investment in shares of the Portfolios should be made solely upon the
information contained herein. Copies of the Trust's Prospectuses, Annual Report
and information regarding each Portfolio's current performance may be obtained
by writing or telephoning:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
800-222-8977
<PAGE> 44
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES............................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions...............................1
Securities Options............................................................................................1
Securities Index Options......................................................................................4
OTC Options...................................................................................................5
Currency Exchange Transactions................................................................................5
Forward Currency Contracts...............................................................................5
Currency Options.........................................................................................6
Currency Hedging.........................................................................................6
Futures Activities............................................................................................7
Futures Contracts.............................................................................................7
Options on Futures Contracts..................................................................................8
Hedging Generally.............................................................................................9
Swaps .....................................................................................................10
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures and Swaps.......................11
Debt Securities...............................................................................................11
Below Investment Grade Securities........................................................................12
Loan Participations and Assignments......................................................................13
Convertible Securities...................................................................................14
Structured Securities....................................................................................14
Mortgage-Backed Securities...............................................................................14
Asset-Backed Securities..................................................................................15
Structured Notes, Bonds or Debentures....................................................................16
**1 Stand-By Commitment Agreements.......................................................................16
Variable Rate and MasterDemand Notes.....................................................................17
**2 Municipal Obligations................................................................................18
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps, Floors and Collars................19
*2 moved from here; text not shown
U.S. Government Securities....................................................................................20
Money Market Obligations......................................................................................20
Repurchase Agreements....................................................................................21
Money Market Mutual Funds................................................................................21
Temporary Defensive Strategies...........................................................................21
Foreign Investments...........................................................................................21
Foreign Currency Exchange................................................................................21
Information..............................................................................................22
Political Instability....................................................................................22
</TABLE>
(i)
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C>
Foreign Markets..........................................................................................22
Increased Expenses.......................................................................................22
Privatizations...........................................................................................23
Foreign Debt Securities..................................................................................23
Brady Bonds..............................................................................................23
Depositary Receipts......................................................................................24
Emerging Markets.........................................................................................24
Euro Conversion..........................................................................................24
Securities of Other Investment Companies......................................................................24
Lending of Portfolio Securities...............................................................................25
Reverse Repurchase Agreements and Dollar Rolls................................................................25
When-Issued Securities and Delayed-Delivery Transactions......................................................26
Short Sales "Against the Box".................................................................................27
*1 moved from here; text not shown
REITs.........................................................................................................27
Warrants......................................................................................................27
Non-Publicly Traded and Illiquid Securities...................................................................28
Rule 144A Securities.....................................................................................29
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers........................................29
"Special Situation" Companies.................................................................................30
Borrowing.....................................................................................................30
Non-Diversified Status........................................................................................30
Other Investment Limitations..................................................................................31
PORTFOLIO VALUATION...........................................................................................32
PORTFOLIO TRANSACTIONS........................................................................................33
PORTFOLIO TURNOVER............................................................................................36
MANAGEMENT OF THE TRUST.......................................................................................36
Officers and Board of Trustees................................................................................36
Trustees' Compensation........................................................................................41
Portfolio Managers............................................................................................41
Investment Adviser and Co-Administrators......................................................................42
Custodians and Transfer Agent.................................................................................43
Distributor...................................................................................................44
Organization of the Trust.....................................................................................44
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................46
ADDITIONAL INFORMATION CONCERNING TAXES.......................................................................46
DETERMINATION OF PERFORMANCE..................................................................................49
INDEPENDENT ACCOUNTANTS AND COUNSEL...........................................................................51
</TABLE>
(ii)
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<TABLE>
<CAPTION>
<S> <C>
FINANCIAL STATEMENTS..........................................................................................51
MISCELLANEOUS.................................................................................................52
</TABLE>
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<PAGE> 47
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the descriptions of each
Portfolio's investment objective and policies in the Prospectuses. There are no
assurances that the Portfolios will achieve their investment objectives.
The investment objective of the Fixed Income Portfolio is
total return consistent with prudent investment management.
The investment objective of the Global Fixed Income Portfolio
is total return consistent with prudent investment management, consisting of a
combination of interest income, currency gains and capital appreciation.
Unless otherwise indicated, all of the Portfolios are
permitted, but not obligated, to engage in the following investment strategies,
subject to any percentage limitations set forth below.
The Portfolios are not obligated to pursue any of the
following strategies and do not represent that these techniques are available
now or will be available at any time in the future.
Options on Securities and Securities Indices and Currency
Exchange Transactions
Each Portfolio may purchase and write (sell) options on
securities, securities indices and currencies for hedging purposes or to
increase total return. Up to 25% of a Portfolio's total assets may be at risk in
connection with investing in options on securities, securities indices and, if
applicable, currencies. The amount of assets considered to be "at risk" in these
transactions is, in the case of purchasing options, the amount of the premium
paid, and, in the case of writing options, the value of the underlying
obligation.
Securities Options. Each Portfolio may write covered put and
call options on stock and debt securities and may purchase such options that are
traded on foreign and U.S. exchanges, as well as OTC options.
Each Portfolio realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price for
a specified time period or at a specified time. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price for a specified
time period or at a specified time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying
<PAGE> 48
security or index is potentially unlimited during the exercise period. Writing
securities options may result in substantial losses to a Portfolio, force the
sale or purchase of portfolio securities at inopportune times or at less
advantageous prices, limit the amount of appreciation the Portfolio could
realize on its investments or require the Portfolio to hold securities it would
otherwise sell.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Portfolio
as the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Portfolio
that writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that the Portfolio may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly, to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Portfolio that are deemed
covered by virtue of the Portfolio's holding convertible or exchangeable
preferred stock or debt securities, the time required to convert or exchange and
obtain physical delivery of the underlying common stock with respect to which
the Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
the Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio will have the absolute right to receive from
the issuer of the underlying security an equal number of shares to replace the
borrowed securities, but the Portfolio may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which the Portfolios may write covered call options. For example,
if a Portfolio writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Portfolio will compensate for the decline in the value of the cover
by purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio will normally have expiration
dates between one and nine months from the date written. The exercise price of
the options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolios may write (i) in-the-money call
options when Warburg Pincus Asset Management, Inc., the Portfolios' investment
adviser
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<PAGE> 49
("Warburg"), expects that the price of the underlying security will remain flat
or decline moderately during the option period, (ii) at-the-money call options
when Warburg expects that the price of the underlying security will remain flat
or advance moderately during the option period and (iii) out-of-the-money call
options when Warburg expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this lower
price, the amount of any realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and in-the-money put options
(the reverse of call options as to the relation of exercise price to market
price) may be used in the same market environments that such call options are
used in equivalent transactions. To secure its obligation to deliver the
underlying security when it writes a call option, a Portfolio will be required
to deposit in escrow the underlying security or other assets in accordance with
the rules of the Options Clearing Corporation (the "Clearing Corporation") and
of the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by the Portfolio
prior to the exercise of options that it has purchased or written, respectively,
of options of the same series) in which the Portfolio may realize a profit or
loss from the sale. An option position may be closed out only where there exists
a secondary market for an option of the same series on a recognized securities
exchange or in the OTC market. When the Portfolio has purchased an option and
engages in a closing sale transaction, whether the Portfolio realizes a profit
or loss will depend upon whether the amount received in the closing sale
transaction is more or less than the premium the Portfolio initially paid for
the original option plus the related transaction costs. Similarly, in cases
where the Portfolio has written an option, it will realize a profit if the cost
of the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security with respect to which it has written
an option from being called or put or, in the case of a call option, to unfreeze
an underlying security (thereby permitting its sale or the writing of a new
option on the security prior to the outstanding option's expiration). The
obligation of the Portfolio under an option it has written would be terminated
by a closing purchase transaction, but the Portfolio would not be deemed to own
an option as a result of the transaction. So long as the obligation of the
Portfolio as the writer of an option continues, the Portfolio may be assigned an
exercise notice by the broker-dealer through which the option was sold,
requiring the Portfolio to deliver the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Portfolio effects a closing purchase transaction. A Portfolio cannot effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
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anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Portfolio's ability to terminate options positions established in the OTC
market may be more limited than for exchange-traded options and may also involve
the risk that securities dealers participating in OTC transactions would fail to
meet their obligations to the Portfolio. The Portfolio, however, intends to
purchase OTC options only from dealers whose debt securities, as determined by
Warburg, are considered to be investment grade. If, as a covered call option
writer, the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security and would
continue to be at market risk on the security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Trust or a Portfolio and other clients of Warburg and certain of its affiliates
may be considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose certain other sanctions. These limits may restrict the number of options
a Portfolio will be able to purchase on a particular security.
Securities Index Options. Each Portfolio may purchase and
write exchange-listed and OTC put and call options on securities indexes. A
securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index, fluctuating
with changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the securities index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the index and the exercise price of the option times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
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OTC Options. The Portfolios may purchase OTC or dealer options
or sell covered OTC options. Unlike exchange-listed options where an
intermediary or clearing corporation, such as the Clearing Corporation, assures
that all transactions in such options are properly executed, the responsibility
for performing all transactions with respect to OTC options rests solely with
the writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Portfolio
were to purchase a dealer option, however, it would rely on the dealer from whom
it purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Portfolio, the Portfolio would
lose the premium it paid for the option and the expected benefit of the
transaction.
Exchange traded options generally have a continuous liquid
market while OTC or dealer options do not. Consequently, the Portfolio will
generally be able to realize the value of a dealer option it has purchased only
by exercising it or reselling it to the dealer who issued it. Similarly, when
the Portfolio writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the option.
Although the Portfolios will seek to enter into dealer options only with dealers
who will agree to and that are expected to be capable of entering into closing
transactions with the Portfolios, there can be no assurance that a Portfolio
will be able to liquidate a dealer option at a favorable price at any time prior
to expiration. The inability to enter into a closing transaction may result in
material losses to a Portfolio. Until a Portfolio, as a covered OTC call option
writer, is able to effect a closing purchase transaction, it will not be able to
liquidate securities (or other assets) used to cover the written option until
the option expires or is exercised. This requirement may impair the Portfolio's
ability to sell portfolio securities or, with respect to currency options,
currencies at a time when such sale might be advantageous.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Portfolio that are invested in foreign securities may be
affected favorably or unfavorably by a variety of factors not applicable to
investment in U.S. securities, and the Portfolio may incur costs in connection
with conversion between various currencies. Currency exchange transactions may
be from any non-U.S. currency into U.S. dollars or into other appropriate
currencies. Each Portfolio will conduct its currency exchange transactions (i)
on a spot (i.e., cash) basis at the rate prevailing in the currency exchange
market, (ii) through entering into futures contracts or options on such
contracts (as described above), (iii) through entering into forward contracts to
purchase or sell currency or (iv) by purchasing and writing exchange-traded
currency options. Risks associated with currency forward contracts and
purchasing currency options are similar to those described herein for futures
contracts and securities and stock index options. In addition, the use of
currency transactions could result in losses from the imposition of foreign
exchange controls, suspension of settlement or other governmental actions or
unexpected events.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed
upon by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted
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<PAGE> 52
directly between currency traders (usually large commercial banks and brokers)
and their customers. Forward currency contracts are similar to currency futures
contracts, except that futures contracts are traded on commodities exchanges and
are standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Portfolio
may either sell a portfolio security and make delivery of the currency, or
retain the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to enter into an
offsetting transaction. If the Portfolio retains the portfolio security and
engages in an offsetting transaction, the Portfolio, at the time of execution of
the offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Portfolios may purchase and write
exchange-traded put and call options on foreign currencies. Put options convey
the right to sell the underlying currency at a price which is anticipated to be
higher than the spot price of the currency at the time the option is exercised.
Call options convey the right to buy the underlying currency at a price which is
expected to be lower than the spot price of the currency at the time the option
is exercised.
Currency Hedging. The Portfolios' currency hedging will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of a Portfolio generally accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. A Portfolio may not position hedge to an extent greater than the
aggregate market value (at the time of entering into the hedge) of the hedged
securities.
A decline in the U.S. dollar value of a foreign currency in
which the Portfolio's securities are denominated will reduce the U.S. dollar
value of the securities, even if their value in the foreign currency remains
constant. The use of currency hedges does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. For example, in order to protect against
diminutions in the U.S. dollar value of non-dollar denominated securities it
holds, a Portfolio may purchase foreign currency put options. If the value of
the foreign currency does decline, the Portfolio will have the right to sell the
foreign currency for a fixed amount in U.S. dollars and will thereby offset, in
whole or in part, the adverse effect on the U.S. dollar value of its securities
that otherwise would have resulted. Conversely, if a rise in the U.S. dollar
value of a currency in which securities to be acquired are denominated is
projected, thereby potentially increasing the cost of the securities, the
Portfolio may purchase call options on the particular currency. The purchase of
these options could offset, at least partially, the effects of the adverse
movements in exchange rates. The benefit to the Portfolio derived from purchases
of currency options, like the benefit derived from other types of options, will
be reduced by premiums and other transaction costs. Because transactions in
currency exchange are generally conducted on a principal basis, no fees or
commissions are generally involved. Currency hedging involves some of the same
risks and considerations as other transactions with similar instruments.
Although currency hedges limit the risk of loss due to a decline in
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the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Portfolio may not be able to contract
to sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of the Portfolio's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Portfolio's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the
Portfolio against a price decline if the issuer's creditworthiness deteriorates.
Futures Activities. Each Portfolio may enter into foreign
currency, interest rate and securities index futures contracts and purchase and
write (sell) related options traded on exchanges designated by the Commodity
Futures Trading Commission (the "CFTC") or consistent with CFTC regulations on
foreign exchanges. These futures contracts are standardized contracts for the
future delivery of foreign currency or an interest rate sensitive security or,
in the case of stock index and certain other futures contracts, a cash
settlement with reference to a specified multiplier times the change in the
specified index, exchange rate or interest rate. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract. These transactions may be entered into for "bona
fide hedging" purposes as defined in CFTC regulations and other permissible
purposes including hedging against changes in the value of portfolio securities
due to anticipated changes in currency values, interest rates and/or market
conditions and increasing return. Aggregate initial margin and premiums
(discussed below) required to establish positions other than those considered to
be "bona fide hedging" by the CFTC will not exceed 5% of the Portfolio's net
asset value after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into. The Portfolios reserve the right to
engage in transactions involving futures contracts and options on futures
contracts to the extent allowed by CFTC regulations in effect from time to time
and in accordance with a Portfolio's policies. There is no overall limit on the
percentage of Portfolio assets that may be at risk with respect to futures
activities.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified non-U.S. currency at a specified price, date,
time and place. An interest rate futures contract provides for the future sale
by one party and the purchase by the other party of a certain amount of a
specific interest rate sensitive financial instrument (debt security) at a
specified price, date, time and place. Securities indexes are capitalization
weighted indexes which reflect the market value of the securities represented in
the indexes. A securities index futures contract is an agreement to be settled
by delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Portfolio upon
entering into a futures contract. Instead, the Portfolio is required to
segregate with its custodian an amount of cash
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<PAGE> 54
or securities acceptable to the broker, equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the exchange on which the
contract is traded, and brokers may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. The broker will have access to amounts in the margin account if
the Portfolio fails to meet its contractual obligations. Subsequent payments,
known as "variation margin," to and from the broker, will be made daily as the
currency, financial instrument or securities index underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." The Portfolios
will also incur brokerage costs in connection with entering into futures
transactions.
At any time prior to the expiration of a futures contract, a
Portfolio may elect to close the position by taking an opposite position, which
will operate to terminate the Portfolio's existing position in the contract.
Positions in futures contracts and options on futures contracts (described
below) may be closed out only on the exchange on which they were entered into
(or through a linked exchange). No secondary market for such contracts exists.
Although the Portfolios may enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio had insufficient cash, it might have to sell securities to meet
daily variation margin requirements at a time when it would be disadvantageous
to do so. In addition, if the transaction is entered into for hedging purposes,
in such circumstances the Portfolio may realize a loss on a futures contract or
option that is not offset by an increase in the value of the hedged position.
Losses incurred in futures transactions and the costs of these transactions will
affect the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase and
write put and call options on foreign currency, interest rate and securities
index a futures contract and may enter into closing transactions with respect to
such options to terminate existing positions. There is no guarantee that such
closing transactions can be effected; the ability to establish and close out
positions on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index
futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied
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<PAGE> 55
by delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on a futures contract is limited to the premium
paid for the option (plus transaction costs). Because the value of the option is
fixed at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of the Portfolio.
Hedging Generally. In addition to entering into options,
futures and currency exchange transactions for other purposes, including
generating current income to offset expenses or increase return, each Portfolio
may enter into these transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite direction of a
portfolio position. A hedge is designed to offset a loss in a portfolio position
with a gain in the hedged position; at the same time, however, a properly
correlated hedge will result in a gain in the portfolio position being offset by
a loss in the hedged position. As a result, the use of options, futures,
contracts and currency exchange transactions for hedging purposes could limit
any potential gain from an increase in the value of the position hedged. In
addition, the movement in the portfolio position hedged may not be of the same
magnitude as movement in the hedge. With respect to futures contracts, since the
value of portfolio securities will far exceed the value of the futures contracts
sold by the Portfolio, an increase in the value of the futures contracts could
only mitigate, but not totally offset, the decline in the value of the
Portfolio's assets.
In hedging transactions based on an index, whether a Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular security. The risk of
imperfect correlation increases as the composition of the Portfolio's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, the Portfolio's hedge positions may be in a greater or lesser dollar
amount than the dollar amount of the hedged position. Such "over hedging" or
"under hedging" may adversely affect the Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.
Securities index futures transactions may be subject to additional correlation
risks. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the stock index
and futures markets. Secondly, from the point of view of speculators, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary price distortions.
Because of the possibility of price distortions in the futures market and the
imperfect correlation between movements in an index and movements in the price
of index futures, a correct forecast of general market trends by Warburg still
may not result in a successful hedging transaction.
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A Portfolio will engage in hedging transactions only when
deemed advisable by Warburg, and successful use by the Portfolio of hedging
transactions will be subject to Warburg's ability to predict trends in currency,
interest rate or securities markets, as the case may be, and to predict
correctly movements in the directions of the hedge and the hedged position and
the correlation between them, which predictions could prove to be inaccurate.
This requires different skills and techniques than predicting changes in the
price of individual securities, and there can be no assurance that the use of
these strategies will be successful. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Losses incurred in hedging transactions and the costs of these transactions will
affect the Portfolio's performance.
To the extent that a Portfolio engages in the strategies
described above, the Portfolio may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the
Portfolio may be unable to close out a position without incurring substantial
losses, if at all. The Portfolio is also subject to the risk of a default by a
counterparty to an off-exchange transaction.
Swaps. Each Portfolio may enter into swaps relating to
interest rates, indexes, currencies and equity interests of foreign issuers. A
swap transaction is an agreement between a Portfolio and a counterparty to act
in accordance with the terms of the swap contract. Interest rate swaps involve
the exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments. Index swaps involve the exchange by the Portfolio with
another party of the respective amounts payable with respect to a notional
principal amount related to one or more indexes. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values. An equity swap is an agreement to exchange streams
of payments computed by reference to a notional amount based on the performance
of a stock index, a basket of stocks or a single stock. A Portfolio may enter
into these transactions for hedging purposes such as to preserve a return or
spread on a particular investment or portion of its assets, to protect against
currency fluctuations, as a duration management technique or to protect against
any increase in the price of securities the Portfolio anticipates purchasing at
a later date. The Portfolios may also use these transactions for speculative
purposes to increase total return, such as to obtain the price performance of a
security without actually purchasing the security in circumstances where, for
example, the subject security is illiquid, is unavailable for direct investment
or available only on less attractive terms. Swaps have risks associated with
them, including possible default by the counterparty to the transaction,
illiquidity and, where swaps are used as hedges, the risk that the use of a swap
could result in losses greater than if the swap had not been employed.
A Portfolio will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the agreement, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. Swaps do
not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to swaps is limited to the net amount
of payments that the Portfolio is contractually obligated to make. If the
counterparty to a swap defaults, the Portfolio's risk of loss consists of the
net amount of payments that the Portfolio is
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contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, Warburg believes such obligations do not constitute senior
securities under the Investment Company Act of 1940, as amended (the "1940
Act"), and, accordingly, will not treat them as being subject to a Portfolio's
borrowing restrictions. Where swaps are entered into for other than hedging
purposes, a Portfolio will segregate an amount of cash or liquid securities
having a value equal to the accrued excess of its obligations over its
entitlements with respect to each swap on a daily basis.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures and Swaps. Each Portfolio will comply with guidelines
established by the U.S. Securities and Exchange Commission (the "SEC") and other
applicable regulatory bodies with respect to coverage of forward currency
contracts; options written by the Portfolio on securities, securities indexes,
currencies and swaps; and currency, interest rate and index futures contracts
and options on these futures contracts. These guidelines may, in certain
instances, require segregation by the Portfolio of cash or liquid securities
with its custodian or a designated sub-custodian to the extent the Portfolio's
obligations with respect to these strategies are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency or by
other portfolio positions or by other means consistent with applicable
regulatory policies. Segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. As a result, there is a possibility that segregation of a large
percentage of a Portfolio's assets could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
For example, a call option written by the Portfolio on
securities may require the Portfolio to hold the securities subject to the call
(or securities convertible into the securities without additional consideration)
or to segregate assets (as described above) sufficient to purchase and deliver
the securities if the call is exercised. A call option written by the Portfolio
on an index may require the Portfolio to own portfolio securities that correlate
with the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise price on a current basis. A put option
written by the Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. The Portfolio may enter into fully or partially offsetting
transactions so that its net position, coupled with any segregated assets (equal
to any remaining obligation), equals its net obligation. Asset coverage may be
achieved by other means when consistent with applicable regulatory policies.
Debt Securities. Each Portfolio may invest without limit in
debt securities. The interest income to be derived may be considered as one
factor in selecting debt securities for investment by Warburg. Because the
market value of debt obligations can be expected to vary inversely to changes in
prevailing interest rates, investing in debt obligations may provide an
opportunity for capital growth when interest rates are expected to decline. The
success of such a strategy is dependent upon Warburg's ability to forecast
accurately changes in interest rates. The market value of debt obligations may
also be expected to vary depending upon,
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among other factors, the ability of the issuer to repay principal and interest,
any change in investment rating and general economic conditions.
Each Portfolio may invest to a limited extent in zero coupon
securities. See "Additional Information Concerning Taxes" for a discussion of
the tax consequences to shareholders as a result of a Portfolio's investment in
zero coupon securities.
A security will be deemed to be investment grade if it is
rated within the four highest grades by Moody's or S&P or, if unrated, is
determined to be of comparable quality by Warburg. Securities rated in the
fourth highest grade may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. Subsequent to its purchase by a Portfolio, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Portfolio. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Portfolio should continue to hold the securities.
Below Investment Grade Securities. Each Portfolio may hold up
to 35% of its net assets in fixed income securities rated below investment grade
and as low as C by Moody's Investors Service, Inc. ("Moody's") or D by Standard
& Poor's Ratings Services ("S&P"), and in comparable unrated securities
considered to be of equivalent quality. Below investment grade debt securities
may be rated as low as C by Moody's or D by S&P, or be deemed by Warburg to be
of equivalent quality. Securities that are rated C by Moody's are the lowest
rated class and can be regarded as having extremely poor prospects of ever
attaining any real investment standing. A security rated D by S&P is in default
or is expected to default upon maturity or payment date. Below investment grade
securities (commonly referred to as "junk bonds"), (i) will likely have some
quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The market values of certain of these securities also
tend to be more sensitive to individual corporate developments and changes in
economic conditions than investment grade securities. In addition, these
securities generally present a higher degree of credit risk. The risk of loss
due to default is significantly greater because these securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
While the market values of below investment grade securities
tend to react less to fluctuations in interest rate levels than do those of
investment grade securities, the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-quality securities. In addition, below
investment grade securities generally present a higher degree of credit risk.
Issuers of below investment grade securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because below investment
grade securities generally are unsecured and frequently are
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subordinated to the prior payment of senior indebtedness. Investors should be
aware that ratings are relative and subjective and are not absolute standards of
quality.
An economic recession could disrupt severely the market for
such securities and may adversely affect the value of such securities and the
ability of the issuers of such securities to repay principal and pay interest
thereon.
A Portfolio may have difficulty disposing of certain of these
securities because there may be a thin trading market. Because there is no
established retail secondary market for many of these securities, the Portfolios
anticipate that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
these securities does exist, it generally is not as liquid as the secondary
market for investment grade securities. The lack of a liquid secondary market,
as well as adverse publicity and investor perception with respect to these
securities, may have an adverse impact on market price and the ability to
dispose of particular issues when necessary to meet the liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Portfolios to obtain
accurate market quotations for purposes of valuing the Portfolios and
calculating their net asset values.
The market value of below investment grade securities is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact the Portfolios' net
asset value. The Portfolios will rely on the judgment, analysis and experience
of Warburg in evaluating the creditworthiness of an issuer. In this evaluation,
Warburg will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Normally, below investment grade securities are not intended for short-term
investment. Each Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings of such securities.
Loan Participations and Assignments. The Portfolios may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of the Portfolios' investments in Loans
are expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in a Portfolio having a contractual
relationship only with the Lender, not with the Borrower. A Portfolio will have
the right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the Borrower. In connection with purchasing
Participations, a Portfolio generally will have no right to enforce compliance
by the Borrower with the terms of the loan agreement relating to the Loan, nor
any rights of set-off against the Borrower, and the Portfolio may not directly
benefit from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a Portfolio will assume the credit risk of both the
Borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Portfolio may be treated as
a general creditor of the Lender and may not benefit from any set-
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off between the Lender and the Borrower. A Portfolio will acquire Participations
only if the Lender interpositioned between the Portfolio and the Borrower is
determined by Warburg to be creditworthy.
When a Portfolio purchases Assignments from Lenders, the
Portfolio will acquire direct rights against the Borrower on the Loan. However,
since Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by a Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Portfolio may have difficulty disposing of them because there is
no liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on a Portfolio's
ability to dispose of particular Participations or Assignments when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the Borrower. The lack
of a liquid market for Participations and Assignments also may make it more
difficult for a Portfolio to assign a value to these securities for purposes of
valuing the Portfolio's portfolio and calculating its net asset value.
Convertible Securities. Convertible securities in which each
Portfolio may invest, including both convertible debt and convertible preferred
stock, may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities enable
an investor to benefit from increases in the market price of the underlying
common stock. Convertible securities provide higher yields than the underlying
equity securities, but generally offer lower yields than non-convertible
securities of similar quality. The value of convertible securities fluctuates in
relation to changes in interest rates like bonds and, in addition, fluctuates in
relation to the underlying common stock.
Structured Securities. Each Portfolio may purchase any type of
publicly traded or privately negotiated fixed income security, including
mortgage-backed securities; structured notes, bonds or debentures; and
assignments of and participations in loans.
Mortgage-Backed Securities. Each Portfolio may invest in
mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") or certain foreign issuers.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or the
issuing agency typically guarantees the payment of interest and principal of
these securities. However, the guarantees do not extend to the securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Portfolio's
shares. These securities generally are "pass-through" instruments, through which
the holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees.
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Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the
Portfolio's yield.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, such as
GNMA, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer
receives mortgage payments from the servicer and the time the issuer makes the
payments on the mortgage-backed securities, and this delay reduces the effective
yield to the holder of such securities.
Asset-Backed Securities. Each Portfolio may invest in
asset-backed securities, which represent participations in, or are secured by
and payable from, assets such as motor vehicle installment sales, installment
loan contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts and special purpose corporations. Payments
or distributions of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit or a pool insurance
policy issued by a financial institution unaffiliated with the trust or
corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which the Portfolio may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the asset-backed securities. In addition, because of the large
number of vehicles
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involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized.
Structured Notes, Bonds or Debentures. Typically, the value of
the principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Portfolio's entire investment. The value of
structured securities may move in the same or the opposite direction as the
value of the Reference, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at
maturity may be a multiple of the change in the value of the Reference so that
the security may be more or less volatile than the Reference, depending on the
multiple. Consequently, structured securities may entail a greater degree of
market risk and volatility than other types of debt obligations.
Stand-By Commitment Agreements. The Portfolios may acquire
"stand-by commitments" with respect to securities held in their portfolios.
Under a stand-by commitment, a dealer agrees to purchase at a Portfolio's option
specified securities at a specified price. The Portfolio's right to exercise
stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by a Portfolio may also be referred to as "put" options. A stand-by
commitment is not transferable by a Portfolio, although the Portfolio can sell
the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the
writer of a commitment may default on its obligation to repurchase the
securities acquired with it. When investing in stand-by commitments, the
Portfolios will seek to enter into stand-by commitments only with brokers,
dealers and banks that, in the opinion of Warburg, present minimal credit risks.
In evaluating the creditworthiness of the issuer of a stand-by commitment,
Warburg will periodically review relevant financial information concerning the
issuer's assets, liabilities and contingent claims. The Portfolios will acquire
stand-by commitments only in order to facilitate portfolio liquidity and do not
intend to exercise their rights under stand-by commitments for trading purposes.
The amount payable to a Portfolio upon its exercise of a
stand-by commitment is normally (i) the Portfolio's acquisition cost of the
securities (excluding any accrued interest which the Portfolio paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the
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Portfolio owned the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period.
The Portfolios expect that stand-by commitments will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Portfolios may pay for
stand-by commitments either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to such commitments (thus
reducing the yield to maturity otherwise available for the same securities). The
total amount paid in either manner for outstanding stand-by commitments held in
a Portfolio's portfolio will not exceed 1/2 of 1% of the value of the
Portfolio's total assets calculated immediately after each stand-by commitment
is acquired.
The Portfolios would acquire stand-by commitments solely
to facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment would
not affect the valuation or assumed maturity of the underlying securities.
Stand-by commitments acquired by a Portfolio would be valued at zero in
determining net asset value. Where a Portfolio paid any consideration directly
or indirectly for a stand-by commitment, its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Portfolio. Stand-by commitments would not affect the average weighted
maturity of the Portfolio's portfolio.
The Internal Revenue Service has issued a revenue ruling
to the effect that a registered investment company will be treated for federal
income tax purposes as the owner of Municipal Obligations acquired subject to a
stand-by commitment and the interest on the Municipal Obligations will be tax
exempt to a Portfolio.
Variable Rate and Master Demand Notes. (Fixed Income
Portfolio) The Fixed Income Portfolio may invest in variable rate and master
demand notes. Variable rate demand notes ("VRDNs") are obligations issued by
corporate or governmental entities which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest upon a short notice period
not to exceed seven days. The interest rates are adjustable at intervals ranging
from daily to up to every six months to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments are typically based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic
adjustment in the interest rate paid (usually tied to the Treasury Bill auction
rate) and permit daily changes in the principal amount borrowed. While there may
be no active secondary market with respect to a particular VRDN purchased by a
Portfolio, the Portfolio may, upon the notice specified in the note, demand
payment of the principal of and accrued interest on the note at any time and may
resell the note at any time to a third party. The absence of such an active
secondary market, however, could make it difficult for the Portfolio to dispose
of the VRDN involved in the event the issuer of the note defaulted on its
payment obligations, and the Portfolio could, for this or other reasons, suffer
a loss to the extent of the default.
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Municipal Obligations. Municipal Obligations are debt
obligations issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities. Municipal Obligations are issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Obligations if the interest paid thereon
is exempt from federal income tax.
The two principal types of Municipal Obligations, in terms of
the source of payment of debt service on the bonds, consist of "general
obligation" and "revenue" issues. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Consequently, the credit quality of revenue bonds is
usually directly related to the credit standing of the user of the facility
involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields while
Municipal Obligations of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by the Fixed Income
Portfolio, an issue of Municipal Obligations may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by the Portfolio.
Warburg will consider such an event in determining whether the Portfolio should
continue to hold the obligation. See the Appendix attached hereto for further
information concerning the ratings of Moody's and S&P and their significance.
Among other instruments, the Fixed Income Portfolio may
purchase short term Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes and other forms of short term loans. Such notes are issued
with a short term maturity in anticipation of the receipt of tax funds, the
proceeds of bond placements or other revenues.
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The yields on Municipal Obligations are dependent upon a
variety of factors, including general economic and monetary conditions, money
market factors, conditions of the municipal bond market, size of a particular
offering, maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Obligations may be materially affected.
Interest Rate, Index, Mortgage and Currency Swaps;
Interest Rate Caps, Floors and Collars. Each Portfolio may enter into interest
rate, index and mortgage swaps and interest rate caps, floors and collars for
hedging purposes or to seek to increase total return; and each Portfolio may
enter into currency swaps for hedging purposes. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for floating
rate payments. Index swaps involve the exchange by the Portfolio with another
party of the respective amounts payable with respect to a notional principal
amount related to one or more indexes. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Currency swaps involve the exchange of cash flows on a notional
amount of two or more currencies based on their relative future values. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates.
A Portfolio will enter into interest rate, index and
mortgage swaps only on a net basis, which means that the two payment streams are
netted out, with the Portfolio receiving or paying, as the case may be, only the
net amount of the two payments. Interest rate, index and mortgage swaps do not
involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate, index and mortgage
swaps is limited to the net amount of interest payments that the Portfolio is
contractually obligated to make. If the other party to an interest rate, index
or mortgage swap defaults, the Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
receive. In contrast, currency swaps usually involve the delivery of a gross
payment stream in one designated currency in exchange for the gross payment
stream in another designated currency. Therefore, the entire payment stream
under a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. To the extent that the net
amount payable by the Portfolio
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under an interest rate, index or mortgage swap and the entire amount of the
payment stream payable by the Portfolio under a currency swap or an interest
rate cap, floor or collar are held in a segregated account consisting of cash or
liquid securities, the Portfolios and Warburg believe that swaps do not
constitute senior securities under the Investment Company Act of 1940, as
amended (the "1940 Act") and, accordingly, will not treat them as being subject
to each Portfolio's borrowing restriction.
A Portfolio will not enter into interest rate, index,
mortgage or currency swaps, or interest rate cap, floor or collar transactions
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either AA or A-1 or better by S&P or Aa or P-1 or
better by Moody's or, if unrated by such rating organizations, determined to be
of comparable quality by Warburg.
U.S. Government Securities. The obligations issued or
guaranteed by the U.S. government in which a Portfolio may invest include:
direct obligations of the U.S. Treasury and obligations issued by U.S.
government agencies and instrumentalities. Included among direct obligations of
the United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ in terms of their interest rates, maturities and dates of issuance.
Treasury Bills have maturities of less than one year, Treasury Notes have
maturities of one to 10 years and Treasury Bonds generally have maturities of
greater than 10 years at the date of issuance. Included among the obligations
issued by agencies and instrumentalities of the United States are: instruments
that are supported by the full faith and credit of the United States (such as
certificates issued by the Government National Mortgage Association ("GNMA"));
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); and instruments
that are supported by the credit of the instrumentality (such as Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds).
Other U.S. government securities the Portfolios may invest in
include securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Loan Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage
Association, Federal Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association. Each
Portfolio may also invest in instruments that are supported by the right of the
issuer to borrow from the U.S. Treasury and instruments that are supported by
the credit of the instrumentality. Because the U.S. government is not obligated
by law to provide support to an instrumentality it sponsors, a Portfolio will
invest in obligations issued by such an instrumentality only if Warburg
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the Portfolio.
Money Market Obligations. Each Portfolio is authorized to
invest under normal market conditions up to 35% of its assets in short-term
money market obligations having remaining maturities of less than one year at
the time of purchase. Money market instruments consist of obligations issued or
guaranteed by the U.S. government or a foreign government,
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their agencies or instrumentalities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic or foreign, domestic
savings and loans and similar institutions) that are high quality investments;
commercial paper rated no lower than A-2 by Standard & Poor's Ratings Services
("S&P") or Prime-2 by Moody's Investors Service, Inc. ("Moody's") or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. Each Portfolio may invest up to 20% of
its total assets in repurchase agreement transactions with member banks of the
Federal Reserve System and certain non-bank dealers. Repurchase agreements are
contracts under which the buyer of a security simultaneously commits to resell
the security to the seller at an agreed-upon price and date. Under the terms of
a typical repurchase agreement, a Portfolio would acquire any underlying
security for a relatively short period (usually not more than one week) subject
to an obligation of the seller to repurchase, and the Portfolio to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Portfolio's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Portfolio's
holding period. The value of the underlying securities will at all times be at
least equal to the total amount of the purchase obligation, including interest.
The Portfolio bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations or becomes bankrupt and the
Portfolio is delayed or prevented from exercising its right to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while the Portfolio seeks to assert
this right. Warburg, acting under the supervision of each Portfolio's Board,
monitors the creditworthiness of those bank and non-bank dealers with which the
Portfolio enters into repurchase agreements to evaluate this risk. A repurchase
agreement is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Warburg believes that it
would be beneficial to a Portfolio and appropriate considering the factors of
return and liquidity, a Portfolio may invest up to 5% of its assets in
securities of money market mutual funds that are unaffiliated with the Portfolio
or Warburg. A money market mutual fund is an investment company that invests in
short-term high quality money market instruments. A money market mutual fund
generally does not purchase securities with a remaining maturity of more than
one year. As a shareholder in any mutual fund, a Portfolio will bear its ratable
share of the mutual fund's expenses, including management fees, and will remain
subject to payment of the Portfolio's management fees and other expenses with
respect to assets so invested.
Temporary Defensive Strategies. For temporary defensive
purposes or, in the case of the Global Fixed Income Portfolio, during times of
international political or economic uncertainty, each Portfolio may invest
without limit in short-term money market obligations.
Foreign Investments. The Fixed Income Portfolio may not invest
more than 35% of its assets in securities denominated in a currency other than
U.S. dollars. Investors should recognize that investing in foreign companies
involves certain risks, including those discussed below, which are in addition
to those associated with investing in U.S. issuers. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in
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such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments positions. A
Portfolio may invest in securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Foreign Currency Exchange. Since the Global Fixed Income
Portfolio will be investing substantially, and the Fixed Income Portfolio may be
investing, in securities denominated in currencies other than the U.S. dollar,
and since the Portfolios may temporarily hold funds in bank deposits or other
money market investments denominated in foreign currencies, each Portfolio's
investments in foreign companies may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between such
currencies and the U.S. dollar. A change in the value of a foreign currency
relative to the U.S. dollar will result in a corresponding change in the U.S.
dollar value of a Portfolio's assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed by a
Portfolio with respect to its foreign investments. Unless otherwise contracted,
the rate of exchange between the U.S. dollar and other currencies is determined
by the forces of supply and demand in the foreign exchange markets. Changes in
the exchange rate may result over time from the interaction of many factors
directly or indirectly affecting economic and political conditions in the United
States and a particular foreign country, including economic and political
developments in other countries. Governmental intervention may also play a
significant role. National governments rarely voluntarily allow their currencies
to float freely in response to economic forces. Sovereign governments use a
variety of techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange rates of
their currencies. A Portfolio may use hedging techniques with the objective of
protecting against loss through the fluctuation of the value of foreign
currencies against the U.S. dollar, particularly the forward market in foreign
exchange, currency options and currency futures.
Information. Many of the foreign securities held by a
Portfolio will not be registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC. Accordingly, there may be less publicly
available information about such securities and about the foreign company or
government issuing them than is available about a domestic company or government
entity. Foreign companies are generally subject to financial reporting
standards, practices and requirements that are either not uniform or less
rigorous than those applicable to U.S. companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Foreign Markets. Securities of some foreign companies are less
liquid and their prices are more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays between
the trade and settlement dates of
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securities purchased or sold, which may result in increased exposure to market
and foreign exchange fluctuation and increased liquidity.
Increased Expenses. To the extent that each Portfolio invests
in foreign securities, the operating expenses of the Fixed Income Portfolio may,
and the Global Fixed Income Portfolio can, be expected to be higher than those
of an investment company investing exclusively in U.S. securities, since the
expenses of each Portfolio associated with foreign investing, such as custodial
costs, valuation costs and communication costs, as well as the rate of the
investment advisory fees, though similar to such expenses of some other
international funds, are higher than those costs incurred by other investment
companies.
Privatizations. Each Portfolio may invest in privatizations
(i.e. foreign government programs of selling interests in government-owned or
controlled enterprises). The ability of U.S. entities, such as the Portfolios,
to participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be available or successful.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed income securities. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Portfolios may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
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Brady Bonds. Each Portfolio may invest in so-called "Brady
Bonds," which have been issued by Costa Rica, Mexico, Uruguay and Venezuela and
which may be issued by other Latin American countries. Brady Bonds are issued as
part of a debt restructuring in which the bonds are issued in exchange for cash
and certain of the country's outstanding commercial bank loans. Investors should
recognize that Brady Bonds do not have a long payment history. Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the OTC secondary market
for debt of Latin American issuers.
Depositary Receipts. Certain of the above risks may be
involved with ADRs, European Depositary Receipts ("EDRs") and International
Depositary Receipts ("IDRs"), instruments that evidence ownership of underlying
securities issued by a foreign corporation. ADRs, EDRs and IDRs may not
necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies. The risks associated with investing in securities of non-U.S. issuers
are generally heightened for investments in securities of issuers in emerging
markets.
Emerging Markets. Each Portfolio may invest in securities of
issuers located in less developed countries considered to be "emerging markets."
Investing in securities of issuers located in emerging markets involves not only
the risks described above with respect to investing in foreign securities, but
also other risks, including exposure to economic structures that are generally
less diverse and mature than, and to political systems that can be expected to
have less stability than, those of developed countries. For example, many
investments in emerging markets experienced significant declines in value due to
political and currency volatility in emerging markets countries during the
latter part of 1997. Other characteristics of emerging markets that may affect
investment there include certain national policies that may restrict investment
by foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities of issuers located in emerging markets and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those securities.
Euro Conversion. The introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in the
Economic and Monetary Union presents unique risks and uncertainties for
investors in those countries, including (i) the functioning of the payment and
operational systems of banks and other financial institutions; (ii) the creation
of suitable clearing and settlement payment schemes for the euro; (iii) the
fluctuation of the euro relative to non-euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond; and (iv) whether
the interest rate, tax and labor regimes of the European countries participating
in the euro will converge over time. Further, the conversion of the currencies
of other Economic Monetary Union countries, such as the United Kingdom, and the
admission of other countries, including Central and Eastern European countries,
to the Economic Monetary Union could adversely affect the euro. These
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or other factors may cause market disruptions and could adversely affect the
value of foreign securities and currencies held by the Portfolios.
Securities of Other Investment Companies. Each Portfolio may
invest in securities of other investment companies to the extent permitted under
the 1940 Act. Presently, under the 1940 Act, a Portfolio may hold securities of
another investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Portfolio's total assets and (iii) when added to all other investment
company securities held by the Portfolio, do not exceed 10% of the value of the
Portfolio's total assets.
Lending of Portfolio Securities. Each Portfolio may lend
portfolio securities to brokers, dealers and other financial organizations that
meet capital and other credit requirements or other criteria established by the
Trust's Board of Trustees (the "Board"). These loans, if and when made, may not
exceed 33-1/3% of a Portfolio's total assets (including the Loan collateral)
taken at value. A Portfolio will not lend portfolio securities to its investment
adviser, any sub-investment adviser or their affiliates unless it has applied
for and received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash or liquid securities, which are
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. From time to time, a Portfolio may return a part
of the interest earned from the investment of collateral received for securities
loaned to the borrower and/or a third party that is unaffiliated with the
Portfolio and that is acting as a "finder."
By lending its securities, a Portfolio can increase its income
by continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. Each Portfolio
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Portfolio must receive at least 100% cash collateral or
equivalent securities of the type discussed in the preceding paragraph from the
borrower; (ii) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (iii) the
Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities and any increase in market
value; (v) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Board must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon the Portfolio's ability to recover the loaned securities or
dispose of the collateral for the loan or possible decline in the value of the
loaned securities during the period in which the Portfolio seeks to assert its
rights.
Reverse Repurchase Agreements and Dollar Rolls. Each Portfolio
may enter into reverse repurchase agreements with member banks of the Federal
Reserve System and
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certain non-bank dealers. Reverse repurchase agreements involve the sale of
securities held by a Portfolio pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time the Portfolio
enters into a reverse repurchase agreement, it will segregate cash or liquid
securities having a value not less than the repurchase price (including accrued
interest). The segregated assets will be marked-to-market daily and additional
assets will be segregated on any day in which the assets fall below the
repurchase price (plus accrued interest). The Portfolio's liquidity and ability
to manage its assets might be affected when it sets aside cash or portfolio
securities to cover such commitments. Reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities the Portfolio has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Portfolio's obligation to repurchase the securities, and the
Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The Portfolios also may enter into "dollar rolls," in which
the Portfolio sells fixed-income securities for delivery in the current month
and simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio would forego principal and interest paid on such
securities. The Portfolio would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
the interest earned on the cash proceeds of the initial sale. At the time the
Portfolio enters into a dollar roll transaction, it will segregate with an
approved custodian cash or liquid securities having a value not less than the
repurchase price (including accrued interest) and will subsequently monitor the
segregated assets to ensure that their value is maintained. Reverse repurchase
agreements and dollar rolls that are accounted for as financings are considered
to be borrowings under the 1940 Act.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may use up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). A Portfolio will enter into a when-issued transaction for the
purpose of acquiring portfolio securities and not for the purpose of leverage,
but may sell the securities before the settlement date if Warburg deems it
advantageous to do so. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the prices obtained on such
securities may be higher or lower than the prices available in the market on the
dates when the investments are actually delivered to the buyers. When a
Portfolio agrees to purchase when-issued or delayed-delivery securities, its
custodian will set aside cash or liquid securities equal to the amount of the
commitment. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment, and in such a case the Portfolio may be required
subsequently to segregate additional assets in order to ensure that the value of
the segregated assets remains equal to the amount of the Portfolio's commitment.
It may be expected that the Portfolio's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it
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sets aside cash. When the Portfolio engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure of
the seller to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
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Short Sales "Against the Box". Each Portfolio may enter into
short sales "against the box." Not more than 10% of a Portfolio's net assets
(taken at current value) may be held as collateral for such sales at any one
time. In a short sale, a Portfolio sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
seller does not immediately deliver the securities sold and is said to have a
short position in those securities until delivery occurs. While a short sale is
made by selling a security a Portfolio does not own, a short sale is "against
the box" to the extent that a Portfolio contemporaneously owns or has the right
to obtain, at no added cost, securities identical to those sold short. If the
Portfolio engages in a short sale, the collateral for the short position will be
segregated by the Portfolio's custodian or qualified sub-custodian. While the
short sale is open, the Portfolio will continue to segregate an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Portfolio's long position.
The Portfolios do not intend to engage in short sales against
the box for investment purposes. A Portfolio may make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security). In such case, any future losses in the
Portfolio's long position should be offset by a gain in the short position and,
conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which such gains or losses are reduced will depend
upon the amount of the security sold short relative to the amount the Portfolio
owns. There will be certain additional transaction costs associated with short
sales against the box, but the Portfolio will endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.
If a Portfolio effects a short sale of securities at a time
when it has an unrealized gain on the securities, it may be required to
recognize that gain as if it had actually sold the securities (as a
"constructive sale") on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Portfolio closes out the short
sale with securities other than the appreciated securities held at the time of
the short sale and if certain other conditions are satisfied. Uncertainty
regarding the tax consequences of effecting short sales may limit the extent to
which a Portfolio may effect short sales.
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REITs. Each Portfolio may invest in real estate investment
trusts ("REITs"), which are
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pooled investment vehicles that invest primarily in income-producing real estate
or real estate related loans or interests. Like regulated investment companies
such as the Trust, REITs are not taxed on income distributed to shareholders
provided they comply with several requirements of the Internal Revenue Code of
1986, as amended (the "Code"). The Portfolio investing in a REIT will indirectly
bear its proportionate share of any expenses paid by the REIT in addition to the
expenses of the Portfolio.
Warrants. Each Portfolio may invest up to 10% of its total
assets in warrants. Warrants are securities that give the holder the right, but
not the obligation to purchase equity issues of the company issuing the
warrants, or a related company, at a fixed price either on a date certain or
during a set period. A Portfolio may purchase warrants issued by domestic and
foreign companies to purchase newly created equity securities consisting of
common and preferred stock. The equity security underlying a warrant is
outstanding at the time the warrant is issued or is issued together with the
warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. At the time of issue, the cost of a
warrant is substantially less than the cost of the underlying security itself,
and price movements in the underlying security are generally magnified in the
price movements of the warrant. This leveraging effect enables the investor to
gain exposure to the underlying security with a relatively low capital
investment. This leveraging increases an investor's risk, however, in the event
of a decline in the value of the underlying security and can result in a
complete loss of the amount invested in the warrant. In addition, the price of a
warrant tends to be more volatile than, and may not correlate exactly to, the
price of the underlying security. If the market price of the underlying security
is below the exercise price of the warrant on its expiration date, the warrant
will generally expire without value. The value of a warrant may decline because
of a decline in the value of the underlying security, the passage of time,
changes in interest rates or in the dividend or other policies of the company
whose equity underlies the warrant or a change in the perception as to the
future price of the underlying security, or any combination thereof. Warrants
generally pay no dividends and confer no voting or other rights other than to
purchase the underlying security.
Non-Publicly Traded and Illiquid Securities. A Portfolio may
not invest more than 15% of its net assets in non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market, repurchase agreements which have a maturity of longer
than seven days, time deposits maturing in more than seven calendar days and,
with respect to the Fixed Income Portfolio, VRDNs and master demand notes
providing for settlement upon more than seven days notice by the Portfolio.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or
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restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Non-publicly traded securities (including Rule 144A
Securities) may involve a high degree of business and financial risk and may
result in substantial losses. These securities may be less liquid than publicly
traded securities, and a Portfolio may take longer to liquidate these positions
than would be the case for publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Portfolio. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that would be applicable
if their securities were publicly traded. A Portfolio's investment in illiquid
securities is subject to the risk that should the Portfolio desire to sell any
of these securities when a ready buyer is not available at a price that is
deemed to be representative of their value, the value of the Portfolio's net
assets could be adversely affected.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Portfolio's limits on the purchase of
illiquid securities unless the Board or its delegates determines that the Rule
144A Securities are liquid. In reaching liquidity decisions, the Board may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the
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nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Investing in Rule 144A Securities could have the effect of
increasing the level of illiquidity in the Portfolios to the extent that
qualified institutional buyers are unavailable or uninterested in purchasing
such securities from the Portfolios. The Board may adopt guidelines and delegate
to Warburg the daily function of determining and monitoring the illiquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
liquidity determinations.
Small Capitalization and Emerging Growth Companies; Unseasoned
Issuers. Investments in small- and medium- sized and emerging growth companies
and companies with continuous operations of less than three years ("unseasoned
issuers"), which may include foreign securities, involve considerations that are
not applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent financial disclosure requirements, illiquidity of
securities and markets, higher brokerage commissions and fees and greater market
risk in general. In addition, securities of these companies may involve greater
risks since these securities may have limited marketability and, thus, may be
more volatile.
"Special Situation" Companies. "Special situation companies"
are involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, may provide an
attractive investment opportunity. If the actual or prospective situation does
not materialize as anticipated, the market price of the securities of a "special
situation company" may decline significantly. Although investing in securities
of small- and medium-sized and emerging growth companies, unseasoned issuers or
issuers in "special situations" offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in a Portfolio may involve a greater degree of
risk than an investment in other mutual funds that seek growth of capital or
capital appreciation by investing in better-known, larger companies.
Borrowing. Each Portfolio may borrow up to 30% of its total
assets for temporary or emergency purposes, including to meet portfolio
redemption requests so as to permit the orderly disposition of portfolio
securities or to facilitate settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when borrowings exceed 5% of
the Portfolio's net assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the borrowing
is outstanding. Each Portfolio expects that some of its borrowings may be made
on a secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable sub-custodian, which may include the lender.
Non-Diversified Status. Each Portfolio is classified as
non-diversified within the meaning of the 1940 Act, which means that it is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. As a non-diversified portfolio,
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<PAGE> 78
each Portfolio may invest a greater proportion of its assets in the obligations
of a smaller number of issuers and, as a result, may be subject to greater risk
with respect to portfolio securities. Each Portfolio's investments will be
limited, however, in order to qualify as a "regulated investment company" for
purposes of the Code. To qualify, each Portfolio will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer or of two or
more issuers in which the Portfolio has 20% or more voting control and which are
in similar or related trades or businesses, and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer and the
Portfolio will not own more than 10% of the outstanding voting securities of a
single issuer.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be
changed without the affirmative vote of the holders of a majority of a
Portfolio's outstanding shares. Such majority is defined as the lesser of (i)
67% or more of the shares present at the meeting, if the holders of more than
50% of the outstanding shares of the Portfolio are present or represented by
proxy, or (ii) more than 50% of the outstanding shares. Investment limitations
10 through 13 may be changed by a vote of the Board at any time. If a percentage
restriction (other than the percentage limitation set forth in No. 1, below) is
adhered to at the time of an investment, a later increase or decrease in the
percentage of assets resulting from a change in the values of portfolio
securities or in the amount of the Portfolio's assets will not constitute a
violation of such restriction.
A Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow from banks for
temporary or emergency purposes and (ii) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Portfolio may not exceed 30% of the value of the
Portfolio's total assets. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options on futures
contracts, forward commitment transactions and dollar roll transactions that are
not accounted for as financings (and the segregation of assets in connection
with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Portfolio may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
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<PAGE> 79
4. Underwrite any securities issued by others except to the extent that
the investment in restricted securities and the sale of securities in accordance
with the Portfolio's investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Portfolio may invest in (i) securities secured by real estate, mortgages or
interests therein and (ii) securities of companies that invest in or sponsor
oil, gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position, except
that the Portfolio may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and make short sales
"against the box."
7. Issue any senior security except as permitted under the 1940 Act.
8. Purchase securities on margin, except that the Portfolio may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Portfolio may purchase and
sell futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Portfolio's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) VRDNs and master demand notes providing for
settlement upon more than seven days notice by the Portfolio and (c) time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
13. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
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PORTFOLIO VALUATION
The following is a description of the procedures used by each
Portfolio in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an OTC market will be valued at the most recent
sale as of the time the valuation is made or, in the absence of sales, at the
mean between the highest bid and lowest asked quotations. If there are no such
quotations, the value of the securities will be taken to be the lowest bid
quotation on the exchange or market. Options or futures contracts will be valued
similarly. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. In determining the market value of portfolio investments, a
Portfolio may employ outside organizations (a "Pricing Service") which may use a
matrix, formula or other objective method that takes into consideration market
indexes, matrices, yield curves and other specific adjustments. The procedures
of Pricing Services are reviewed periodically by the officers of the Trust under
the general supervision and responsibility of the Board, which may replace a
Pricing Service at any time. Short-Term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as determined
by the Board. Amortized cost involves valuing a portfolio instrument at its
initial cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. The amortized cost method of valuation may
also be used with respect to other debt obligations with 60 days or less
remaining to maturity. Securities, options and futures contracts for which
market quotations are not available and certain other assets of a Portfolio will
be valued at their fair value as determined in good faith pursuant to
consistently applied procedures established by the Board. In addition, the Board
or its delegates may value a security at fair value if it determines that such
security's value determined by the methodology set forth above does not reflect
its fair value.
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE")
is open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which a Portfolio's net asset value is not
calculated. As a result, calculation of a Portfolio's net asset value may not
take place contemporaneously with the determination of the prices of certain
portfolio securities used in such calculation. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service. If such
quotations are not available, the rate of exchange will be determined in good
faith pursuant to consistently applied procedures established by the Board. No
brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
PORTFOLIO TRANSACTIONS
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Warburg is responsible for establishing, reviewing and, where
necessary, modifying each Portfolio's investment program to achieve its
investment objectives. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or OTC, depending
on where it appears that the best price or execution will be obtained. The
purchase price paid by a Portfolio to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of securities from dealers, acting as either principals or agents in
the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed. There is generally no stated
commission in the case of securities traded in domestic or foreign OTC markets,
but the price of securities traded in OTC markets includes an undisclosed
commission or mark-up. U.S. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for each Portfolio and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to a
Portfolio and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
due to brokerage business on behalf of the Portfolios may be useful to Warburg
in serving its other clients and, conversely, research or other services
obtained by the placement of business of other clients may be useful to Warburg
in carrying out its obligations to the Portfolios. Research may include
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities; furnishing seminars, information, analyses and reports concerning
issuers, industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management personnel,
industry experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services; and
products and other services (such as third party publications, reports and
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analyses, and computer and electronic access, equipment, software, information
and accessories that deliver, process or otherwise utilize information,
including the research described above) that assist Warburg in carrying out its
responsibilities. For the fiscal year ended December 31, 1998, no brokerage
commissions were paid by the Fixed Income and Global Fixed Income Portfolios to
brokers and dealers who provided such research and other services. Research
received from brokers or dealers is supplemental to Warburg's own research
program. The fees to Warburg under its advisory agreements with each Portfolio
are not reduced by reason of its receiving any brokerage and research services.
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<PAGE> 83
The following table details amounts paid by each Portfolio in
commissions to broker-dealers for execution of portfolio transactions during the
period from March 31, 1997 (commencement of operations) through December 31,
1997 and the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
1997 1998
------------------------------
<S> <C> <C>
Fixed Income Portfolio $18 $ 0
Global Fixed Income Portfolio $ 0 $ 0
</TABLE>
The table below shows the amounts of outstanding repurchase
agreements that a Portfolio had, as of December 31, 1998, with Merrill Lynch &
Co., one of the regular broker-dealers of each Portfolio.
<TABLE>
<S> <C>
------------------------------------------------ --------
Fixed Income Portfolio $ 38,000
------------------------------------------------ --------
Global Fixed Income Portfolio $129,000
------------------------------------------------ --------
</TABLE>
Investment decisions for each Portfolio concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg. Such other investment clients may invest in the same securities as a
Portfolio. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Warburg believes to be equitable to each client, including the
Portfolios. In some instances, this investment procedure may adversely affect
the price paid or received by a Portfolio or the size of the position obtained
or sold for a Portfolio. To the extent permitted by law, securities to be sold
or purchased for a Portfolio may be aggregated with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for a Portfolio may be executed
through Counsellors Securities Inc. ("Counsellors Securities"), located at 466
Lexington Avenue, New York, New York 10017, the Trust's distributor and a
wholly-owned subsidiary of Warburg, if, in Warburg's judgment, the use of
Counsellors Securities is likely to result in price and execution at least as
favorable as those of other qualified brokers, and if, in the transaction,
Counsellors Securities charges the Portfolio a commission rate consistent with
those charged by Counsellors Securities to comparable unaffiliated customers in
similar transactions. All transactions with affiliated brokers will comply with
Rule 17e-1 under the 1940 Act. In no instance will portfolio securities be
purchased from or sold to Warburg or Counsellors Securities or any affiliated
person of such companies.
Transactions for the Portfolios may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Portfolios will deal directly with the dealers
who make a market in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Such dealers usually
are acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net
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<PAGE> 84
basis and do not normally involve brokerage commissions. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
Each Portfolio may participate, if and when practicable, in
bidding for the purchase of securities for the Portfolio's portfolio directly
from an issuer in order to take advantage of the lower purchase price available
to members of such a group. A Portfolio will engage in this practice, however,
only when Warburg, in its sole discretion, believes such practice to be
otherwise in the Portfolio's interest.
PORTFOLIO TURNOVER
A Portfolio's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of its portfolio securities for the
year by the monthly average value of the portfolio securities. Securities with
remaining maturities of one year or less at the date of acquisition are excluded
from the calculation.
The Portfolios do not intend to seek profits through
short-term trading, but the rate of turnover will not be a limiting factor when
the Portfolios deem it desirable to sell or purchase securities. Certain
practices that may be employed by each Portfolio could result in high portfolio
turnover. For example, portfolio securities may be sold in anticipation of a
rise in interest rates (market decline) or purchased in anticipation of a
decline in interest rates (market rise) and later sold. In addition, a security
may be sold and another of comparable quality purchased at approximately the
same time to take advantage of what Warburg believes to be a temporary disparity
in the normal yield relationship between the two securities. These yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, such as changes
in the overall demand for, or supply of, various types of securities. In
addition, options on securities may be sold in anticipation of a decline in the
price of the underlying security (market decline) or purchased in anticipation
of a rise in the price of the underlying security (market rise) and later sold.
It is not possible to predict the Portfolios' portfolio
turnover rates. High portfolio turnover rates (100% or more) may result in
dealer markups or underwriting commissions as well as other transaction costs,
including correspondingly higher brokerage commissions. In addition, short-term
gains realized from portfolio turnover may be taxable to shareholders as
ordinary income.
MANAGEMENT OF THE TRUST
Officers and Board of Trustees
The business and affairs of the Trust are managed by the Board
of Trustees in accordance with the laws of the Commonwealth of Massachusetts.
The Board elects officers who are responsible for the day-to-day operations of
the Trust and who execute policies authorized by the Board. Under the Trust's
Declaration of Trust, the Board may classify or reclassify any unissued shares
of the Trust into one or more additional classes by setting or
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<PAGE> 85
changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Board may similarly classify or reclassify any
class of its shares into one or more series and, without shareholder approval,
may increase the number of authorized shares of the Trust.
The names (and ages) of the Trust's Trustees and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
Richard N. Cooper (64) * Trustee
Harvard University Professor at Harvard University;
1737 Cambridge Street National Intelligence Council from
Cambridge, Massachusetts 02138 June 1995 until January 1997;
Director or Trustee of Circuit City
Stores, Inc. (Retail electronics
and appliances) and Phoenix Home
Life Mutual Insurance Company;
Director/Trustee of other
investment companies in the Warburg
Pincus family of funds.
Jack W. Fritz (71) Trustee
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting,
Wilson, Wyoming 83014 Inc. and Fritz Communications
(developers and operators of radio
stations); Director of Advo, Inc.
(direct mail advertising);
Director/Trustee of other
investment companies in the Warburg
Pincus family of funds.
John L. Furth* (68) Chairman of the Board
466 Lexington Avenue Chairman, Director and a Managing
New York, New York 10017-3147 Director of Warburg since 1970;
Chairman of the Board and Officer
of other investment companies in
the Warburg Pincus family of funds.
Jeffrey E. Garten (52) Trustee
Box 208200 Dean of Yale School of Management
New Haven, Connecticut 06520-8200 and William S. Beinecke Professor
in the Practice of International
Trade and Finance; Undersecretary
of Commerce for International Trade
from November 1993 to October 1995;
Director/Trustee of other
investment companies in the Warburg
Pincus family of funds.
* Indicates a Trustee who is an "interested person" of the Trust as
defined in the 1940 Act.
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<PAGE> 86
Thomas A. Melfe (67) Trustee
1251 Avenue of the Americas Partner in the law firm
29th Floor Piper & Marbury,L.L.P.; Partner in
New York, New York 10020-1104 the law firm of Donovan Leisure
Newton & Irvine from April 1984 to
April 1998; Chairman of the Board,
Municipal Fund for New York
Investors, Inc.; Director/Trustee
of other investment companies in
the Warburg Pincus family of funds.
Arnold M. Reichman* (50) Trustee
466 Lexington Avenue Managing Director, Chief Operating
New York, New York 10017-3147 Officer and Assistant Secretary of
Warburg; Associated with Warburg
since 1984; Officer of Counsellors
Securities; Director/Trustee of
other investment companies in the
Warburg Pincus family of funds.
Alexander B. Trowbridge (69) Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners,
Washington, DC 20004 Inc. (business consulting) from
January 1990 to January 1994;
Director or Trustee of New England
Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals),
WMX Technologies, Inc. (solid and
hazardous waste collection and
disposal), The Rouse Company (real
estate development), Harris Corp.
(electronics and communications
equipment), The Gillette Co.
(personal care products) and Sun
Company Inc. (petroleum refining
and marketing); Director/Trustee of
other investment companies in the
Warburg Pincus family of funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1991
Officer of Counsellors Securities
and other investment companies in
the Warburg Pincus family of funds
* Indicates a Trustee who is an "interested person" of the Trust as
defined in the 1940 Act.
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<PAGE> 87
Steven B. Plump (40) Executive Vice President
466 Lexington Avenue Senior Vice President of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1995;
Associated with Chemical Investment
Services and its affiliates from
1993 until 1995. Officer of
Counsellors Securities and other
investment companies in the Warburg
Pincus family of funds.
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1984;
Officer of Counsellors Securities
and other investment companies in
the Warburg Pincus family of funds.
Janna Manes (31) Vice President and Secretary
466 Lexington Avenue Vice President of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1996;
Associated with the law firm of
Willkie Farr & Gallagher from 1993
to 1996; Officer of other
investment companies in the Warburg
Pincus family of funds.
Howard Conroy, CPA (45) Vice President and Chief Financial
466 Lexington Avenue Officer
New York, New York 10017-3147 Vice President of Warburg;
Associated with Warburg since 1992
Officer of other investment
companies in the Warburg Pincus
family of funds.
Daniel S. Madden, CPA (33)
466 Lexington Avenue Treasurer and Chief Accounting
New York, New York 10017-3147 Officer
Vice President of Warburg;
Associated with Warburg since 1995;
Associated with BlackRock Financial
Management, Inc. from September
1994 to October 1996; Associated
with BEA Associates from April 1993
to September 1994; Officer of other
investment companies in the Warburg
Pincus family of funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1997;
Associated with the law firm of
Gordon Altman Butowsky Weitzen
Shalov & Wein from 1995 to 1997;
Officer of other investment
companies in the Warburg Pincus
family of funds.
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<PAGE> 88
No employee of Warburg or PFPC Inc., the Trust's co-administrator ("PFPC"), or
any of their affiliates receives any compensation from the Trust for acting as
an officer or Trustee of the Trust. For each fund in the Warburg Pincus family
of funds, each Director/Trustee who is not a director, trustee, officer or
employee of Warburg, PFPC or any of their affiliates receives an annual fee of
$500, $1,000 or $2,000 per fund for Director/Trustee services provided, $250 for
each Board meeting attended and $400 for each Audit Committee meeting attended,
in addition to reimbursement for expenses incurred in connection with attendance
at Board meetings.
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<PAGE> 89
Trustees' Compensation
(for the fiscal year ended December 31, 1998)
<TABLE>
<CAPTION>
Total Compensation from
Total all Investment Companies
Name of Director Compensation from in Warburg Pincus
Trust Fund Complex*
<S> <C> <C>
John L. Furth** None None
Arnold M. Reichman** None None
Richard N. Cooper $2,150 $56,600
Donald J. Donahue*** $475 $13,525
Jack W. Fritz $2,400 $63,100
Jeffrey E. Garten**** $1,925 $49,325
Thomas A. Melfe $2400 $60,700
Alexander B. Trowbridge $2,250 $64,000
</TABLE>
- --------------------------
* Each Trustee serves as a Director or Trustee of 39 investment companies
in the Warburg Pincus family of funds, except for Mr. Melfe, who also
serves as a Director or Trustee of 22 investment companies in the
Warburg Pincus family of funds.
** Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg, and, accordingly, receive no compensation from the Trust or
any other investment company in the Warburg Pincus family of funds.
*** Mr. Donahue resigned as Trustee of the Trust effective February 6,
1998.
**** Mr. Garten became a Trustee of the Trust effective February 6, 1998.
As of March 30, 1999, no Trustees or officers of the Trust owned any of
the outstanding shares of the Portfolios.
Portfolio Managers
M. Anthony E. van Daalen, Portfolio Manager of the Fixed
Income Portfolio, earned a B.A. degree from Wesleyan University and a M.B.A.
degree from New York University. Mr. van Daalen also manages other Warburg
Pincus Funds. He has been a Portfolio Manager for Warburg Pincus Funds since
joining Warburg in 1992, specializing in government and high yield bonds. Mr.
van Daalen was an assistant vice president, portfolio manager at Citibank in the
Private Banking Group from 1985 to 1991. Prior to that Mr. van Daalen was a
retail banking manager at The Connecticut Bank and Trust Co. from 1983 to 1985
and an analyst at Goldstein/Krall Market Research from 1982 to 1983.
Charles C. Van Vleet, Portfolio Manager of the Global Fixed
Income Portfolio, received a B.A. degree from the University of California,
Berkeley. Mr. Van Vleet also manages other Warburg Pincus Funds. Prior to
joining Warburg in May 1998, Mr. Van Vleet was a senior vice president and
senior global strategist at Putnam Investment Management
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<PAGE> 90
from 1994 to 1998. Prior to that Mr. Van Vleet served as vice president and
senior portfolio manager at Alliance Capital Management.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to each Portfolio,
Counsellors Funds Service, Inc. ("Counsellors Service") serves as a
co-administrator to the Trust and PFPC serves as a co-administrator to the Trust
pursuant to separate written agreements (the "Advisory Agreements," the
"Counsellors Service Co-Administration Agreement" and the "PFPC
Co-Administration Agreement," respectively). Warburg, subject to the control of
the Trust's officers and the Board, manages the investment and reinvestment of
the assets of the Portfolios in accordance with each Portfolio's investment
objective and stated investment policies. Warburg makes investment decisions for
each Portfolio and places orders to purchase or sell securities on behalf of the
Portfolio. Warburg also employs a support staff of management personnel to
provide services to the Trust and furnishes the Trust with office space,
furnishings and equipment.
For the services provided by Warburg, the Trust pays Warburg a
fee calculated at an annual rate equal to percentages of the relevant
Portfolio's average daily net assets, as follows: Fixed Income Portfolio --.50%
and Global Fixed Income Portfolio -- 1.00%. Warburg and the Portfolios'
co-administrators may voluntarily waive a portion of their fees from time to
time and temporarily limit the expenses to be borne by the Portfolios.
As co-administrator, Counsellors Service provides shareholder
liaison services to the Portfolios, including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing certain
executive and administrative services, acting as liaison between each Portfolio
and its various service providers, furnishing corporate secretarial services,
which include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and developing and monitoring compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
As a co-administrator, PFPC calculates each Portfolio's net
asset value, provides all accounting services for the Portfolios and assists in
related aspects of the Portfolios' operations. As compensation, each Portfolio
pays PFPC a fee calculated at an annual rate of .05% of average daily net
assets. PFPC has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809.
The advisory fees earned by Warburg and the co-administration
fees earned by PFPC and Counsellors Service, respectively, for the period from
March 31, 1997 (commencement of operations) to December 31, 1997 and for the
fiscal year ended December 31, 1998 are described below.
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<PAGE> 91
Advisory Fees earned by Warburg for the fiscal years ended December 31 (portions
of fees waived, if any, are noted in parentheses next to the amount earned)*
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C> <C>
Fixed Income $ 2,166 ($2,166) $ 6,619 ($ 6,619)
------- ------- ------- --------
Global Fixed $12,047 ($12,047) $16,787 ($16,787)
------- -------- ------- --------
Income
</TABLE>
- ------------------
* During the periods ended December 31, 1997 and 1998, Warburg also
reimbursed expenses of $53,791 and $50,074, respectively, to the Fixed
Income Portfolio and $50,728 and $32,729, respectively, to the Global
Fixed Income Portfolio.
Co-Administration Fees earned by PFPC for the fiscal years ended December 31
(portions of fees waived, if any, are noted in parentheses next to the amount
earned)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C> <C>
Fixed Income $216 ($216) $4,662 ($662)
---- ----- ------ -----
Global Fixed Income $602 ($602) $2,911 ($839)
---- ----- ------ -----
</TABLE>
Co-Administration Fees earned by Counsellors Service for the fiscal years ended
December 31
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Fixed Income $433 $1,324
---- ------
Global Fixed Income $1,205 $1,679
------ ------
</TABLE>
Custodians and Transfer Agent
PFPC Trust Company ("PFPC Trust") serves as custodian of each
Portfolio's U.S. assets and State Street Bank and Trust Company ("State Street")
serves as custodian of each Portfolio's non-U.S. assets. Each custodian serves
pursuant to separate custodian agreements (the "Custodian Agreements"). Under
the Custodian Agreements PFPC Trust and State Street each (i) maintains a
separate account or accounts in the name of the relevant Portfolio, (ii) holds
and transfers portfolio securities on account of the relevant Portfolio, (iii)
makes receipts and disbursements of money on behalf of the relevant Portfolio,
(iv) collects and receives all income and other payments and distributions on
account of the relevant Portfolio's portfolio securities held by it and (v)
makes periodic reports to the Board concerning the Trust's custodial
arrangements. PFPC Trust may delegate its duties under its Custodian Agreement
with the Trust to a wholly owned direct or indirect subsidiary of PFPC Trust or
PNC Bank Corp. upon notice to the Trust and upon the satisfaction of certain
other conditions. State Street is authorized to select one or more foreign
banking institutions and foreign securities depositaries as sub-custodian on
behalf of the relevant Portfolio and PFPC Trust is authorized to select one or
more domestic banks or trust companies to serve as sub-custodian on behalf of
the Portfolios. PFPC Trust has entered into a sub-custodian agreement with PNC
Bank, National Association ("PNC"), pursuant to which PNC provides asset
safekeeping and securities clearing services. PFPC Trust and PNC are
indirect wholly owned subsidiaries of PNC Bank Corp., and their principal
business address is 200 Stevens Drive, Suite 440, Lester, Pennsylvania
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<PAGE> 92
19113. The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of the Trust pursuant to a Transfer
Agency and Service Agreement, under which State Street (i) issues and redeems
shares of each Portfolio, (ii) addresses and mails all communications by the
Trust to record owners of Portfolio shares, including reports to shareholders,
dividend and distribution notices and proxy material for its meetings of
shareholders, (iii) maintains shareholder accounts and, if requested,
sub-accounts and (iv) makes periodic reports to the Board concerning the
transfer agent's operations with respect to the Trust. State Street has
delegated to Boston Financial Data Services, Inc., an affiliate of State Street
("BFDS"), responsibility for most shareholder servicing functions. BFDS's
principal business address is 2 Heritage Drive, Boston, Massachusetts 02171.
Distributor
Counsellors Securities, a wholly owned subsidiary of Warburg,
acts as the distributor of the Portfolios. Counsellors Securities' principal
business address is 466 Lexington Avenue, New York, New York 10017.
Organization of the Trust
The Trust was organized on December 16, 1996 under the laws of
the Commonwealth of Massachusetts as a "Massachusetts business trust." The
Trust's Declaration of Trust authorizes the Board to issue an unlimited number
of full and fractional shares of beneficial interest, $.001 par value per share.
Shares of two series have been authorized, which constitute the interests in the
Portfolios. The Board may classify or reclassify any of its shares into one or
more additional series without shareholder approval.
When matters are submitted for shareholder vote, shareholders
of each Portfolio will have one vote for each full share held and fractional
votes for fractional shares held. Generally, shares of the Trust will vote by
individual Portfolio on all matters except where otherwise required by law.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the members
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Trustee at the written request of holders of 10% of
the Trust's outstanding shares. Under current law, a Participating Insurance
Company is required to request voting instructions from Variable Contract owners
and must vote all Trust shares held in the separate account in proportion to the
voting instructions received. Plans may or may not pass through voting rights to
Plan participants, depending on the terms of the Plan's governing documents. For
a more complete discussion of voting rights, refer to the sponsoring
Participating Insurance Company separate account prospectus or the Plan
documents or other informational materials supplied by Plan sponsors.
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<PAGE> 93
Each Portfolio may compare its performance with (i) that of
other mutual funds with similar investment objectives and policies, which may be
based on the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds; (ii) in the
case of the Fixed Income Portfolio, with the Lehman Intermediate
Government/Corporate Bond Index (an unmanaged index of government and corporate
bonds calculated by Lehman Brothers); in the case of the Global Fixed Income
Portfolio, with the Salomon Brothers World Government Bond Index (a hedged,
market-capitalization weighted index designed to track major government debt
markets), Lehman Brothers Aggregate Index and the Lipper World Income Average
(an average of funds that invest primarily in non-U.S. dollar and U.S. dollar
debt instruments); in the case of the Intermediate Government Fund, with the
Lehman Intermediate Government Bond Index (an unmanaged index of government
bonds calculated by Lehman Brothers); and in the case of the New York Municipal
Portfolio, with the Lehman 5-Year Municipal Bond Index and the Lipper New York
Intermediate Municipal Debt Funds Average (an unmanaged index of 61 Intermediate
Municipal Debt Funds calculated by Lipper Analytical Services); or (iii) other
appropriate indexes of investment securities or with data developed by Warburg
derived from such indexes. A Portfolio may also include evaluations of the
Portfolio published by nationally recognized ranking services and by financial
publications such as Barron's, Business Week, Financial Times, Forbes, Fortune,
Inc., Institutional Investor, Investor's Business Daily, Money, Morningstar,
Mutual Fund Magazine, SmartMoney, The Wall Street Journal and Worth.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various time periods. In addition, each Portfolio may from time to time
compare its expense ratio to that of investment companies with similar
objectives and policies, based on data generated by Lipper Analytical Services,
Inc. or similar investment services that monitor mutual funds.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of a
Portfolio. However, the Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from a Portfolio's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the relevant Portfolio would be unable to meet
its obligations, a possibility that Warburg believes is remote and immaterial.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
relevant Portfolio. The Trustees intend to conduct the operations of the Trust
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Trust.
All shareholders of a Portfolio, upon liquidation, will
participate ratably in the Portfolio's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees. Shares are transferable but
have no preemptive, conversion or subscription rights.
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<PAGE> 94
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios may not be purchased or redeemed by
individual investors directly but may be purchased or redeemed only through
Variable Contracts offered by separate accounts of Participating Insurance
Companies and through Plans, including participant-directed Plans which elect to
make a Portfolio an investment option for Plan participants. The offering price
of each Portfolio's shares is equal to its per share net asset value.
Under the 1940 Act, a Portfolio may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (A Portfolio may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable, a Portfolio may make payment wholly or
partly in securities or other investment instruments which may not constitute
securities as such term is defined in the applicable securities laws. If a
redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds. The Trust intends to comply with Rule 18f-1 promulgated under the 1940
Act with respect to redemptions in kind.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Trust and its shareholders is intended to be only a summary and is
not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult the sponsoring Participating
Insurance Company separate account prospectus or the Plan documents or other
informational materials supplied by Plan sponsors and their own tax advisers
with respect to the particular tax consequences to them of an investment in a
Portfolio.
Each Portfolio intends to qualify as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, a Portfolio will effectively pay no federal income taxes on
its taxable net investment income (that is, taxable income other than net
realized capital gains) and its net realized capital gains that are distributed
to shareholders. To qualify under Subchapter M, a Portfolio must, among other
things: (i) distribute to its shareholders the sum of at least 90% of its
taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains) plus at least 90%
of its net tax-exempt interest income; (ii) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities,
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures, and forward contracts)
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<PAGE> 95
derived with respect to its business of investing in such stock, securities or
foreign currencies; and (iii) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio (a) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. Government Securities,
securities of other regulated investment companies and other securities, with
those other securities limited, with respect to any one issuer, to an amount no
greater in value than 5% of the Portfolio's total assets and to not more than
10% of the outstanding voting securities of the issuer, and (b) not more than
25% of the market value of the Portfolio's assets is invested in the securities
of any one issuer (other than U.S. Government Securities or securities of other
regulated investment companies) or of two or more issuers that the Portfolio
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses.
If, in any taxable year, a Portfolio fails to qualify as a
regulated investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Portfolio in
computing its taxable income. In addition, in the event of a failure to qualify,
the Portfolio's distributions, to the extent derived from the Portfolio's
current or accumulated earnings and profits would constitute dividends (eligible
for the corporate dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those distributions might otherwise
(at least in part) have been treated in the shareholders' hands as long-term
capital gains. If a Portfolio fails to qualify as a regulated investment company
in any year, it must pay out its earnings and profits accumulated in that year
in order to qualify again as a regulated investment company. In addition, if a
Portfolio failed to qualify as a regulated investment company for a period
greater than one taxable year, the Portfolio may be required to recognize any
net built-in gains (the excess of the aggregate gains, including items of
income, over aggregate losses that would have been realized if it had been
liquidated) in order to qualify as a regulated investment company in a
subsequent year.
In addition, each Portfolio intends to comply with the
diversification requirements of Section 817(h) of the Code related to the
tax-deferred status of insurance company separate accounts. To comply with
regulations under Section 817(h) of the Code, each Portfolio will be required to
diversify its investments so that on the last day of each calendar quarter no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% is represented by any two investments, no more than 80% is
represented by any three investments and no more than 90% is represented by any
four investments. Generally, all securities of the same issuer are treated as a
single investment. For the purposes of Section 817(h), obligations of the United
States Treasury and each U.S. government agency or instrumentality are treated
as securities of separate issuers. The Treasury Department has indicated that it
may issue future pronouncements addressing the circumstances in which a Variable
Contract owner's control of the investments of a separate account may cause the
Variable Contract owner, rather than the Participating Insurance Company, to be
treated as the owner of the assets held by the separate account. If the Variable
Contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be included
currently in the Variable Contract owner's gross income. It is not known what
standards will be set forth in such pronouncements or when, if at all, these
pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that the Portfolios will be able
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<PAGE> 96
to operate as currently described, or that the Trust will not have to change the
investment goal or investment policies of a Portfolio. While a Portfolio's
investment goal is fundamental and may be changed only by a vote of a majority
of the Portfolio's outstanding shares, the Board reserves the right to modify
the investment policies of a Portfolio as necessary to prevent any such
prospective rules and regulations from causing a Variable Contract owner to be
considered the owner of the shares of the Portfolio underlying the separate
account.
A Portfolio's short sales against the box, if any, and
transactions, if any, in foreign currencies, forward contracts, options and
futures contracts (including options, futures contracts and forward contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses recognized by
the Portfolio (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Portfolio, defer Portfolio
losses and cause the Portfolio to be subject to hyperinflationary currency
rules. These rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (i) will require a
Portfolio to mark-to-market certain types of its positions (i.e., treat them as
if they were closed out) and (ii) may cause the Portfolio to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. Each Portfolio will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in a short sale against-the-box or acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (a) neither the Portfolio nor its shareholders will be treated as receiving
a materially greater amount of capital gains or distributions than actually
realized or received, (b) the Portfolio will be able to use substantially all of
its losses for the fiscal years in which the losses actually occur and (c) the
Portfolio will continue to qualify as a regulated investment company.
Investments by a Portfolio in zero coupon securities may
create special tax consequences. Zero coupon securities do not make interest
payments, although a portion of the difference between a zero coupon security's
face value and its purchase price is imputed as income to the Portfolio each
year even though the Portfolio receives no cash distribution until maturity.
Under the U.S. federal tax laws, the Portfolio will not be subject to tax on
this income if it pays dividends to its shareholders substantially equal to all
the income received from, or imputed with respect to, its investments during the
year, including its zero coupon securities. These dividends ordinarily will
constitute taxable income to the shareholders of the Portfolio.
Because shares of a Portfolio may only be purchased through
Variable Contracts and Plans, it is anticipated that dividends and distributions
will be exempt from current taxation if left to accumulate within the Variable
Contracts or Plans.
Income received by a Portfolio from investments in foreign
securities may be subject to withholding and other taxes imposed by foreign
countries. The foreign taxes paid by a Portfolio will reduce its return from
investments in such Portfolio.
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<PAGE> 97
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return or
yield in advertisements or in reports and other communications to shareholders.
The average annual total returns for the Portfolios for the fiscal periods ended
December 31, 1998, were as follows (performance figures calculated without the
waiver of fees by a Portfolio's service providers, if any, are noted in
italics):
<TABLE>
<CAPTION>
One-Year Since Inception (Date)
-------- ----------------------
<S> <C> <C> <C> <C>
Fixed Income 8.08% 5.87% 17.76% 7.38%
---- ---- ----- ----
(3/31/97)
---------
Global Fixed Income 12.09% 8.81% 15.47% 8.22%
----- ---- ----- ----
(3/31/97)
---------
</TABLE>
These total return figures show the average percentage change
in value of an investment in a Portfolio from the beginning of the measurement
period to the end of the measurement period. The figures reflect changes in the
price of the Portfolio's shares assuming that any income dividends and/or
capital gain distributions made by the Portfolio during the period were
reinvested in shares of the Portfolio. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as from commencement of the Portfolio's operations or on a year-by-year,
quarterly or current year-to-date basis).
Total return is calculated by finding the average annual
compounded rates of return for the one-, five-, and ten(or such shorter period
as the Portfolio has been offered) year periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a hypothetical
investment of $1,000; "T" is average annual total return; "n" is number of
years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five- or ten-year periods (or fractional
portion thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000 investment over the period and assumes
that all dividends and distributions are reinvested during the period.
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that such return may not be
representative of any Portfolio's return over a longer market cycle. A Portfolio
may also advertise aggregate total return figures for various periods,
representing the cumulative change in value of an investment in the relevant
Portfolio for the specific period. Aggregate and average total returns may be
shown by means of schedules, charts or graphs, and may indicate various
components of total return (i.e., change in value of initial investment, income
dividends and capital gain distributions).
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<PAGE> 98
A Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. A Portfolio may advertise average annual
calendar-year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph, except that the
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the Portfolio's
total return in longer market cycles.
Yield is calculated by annualizing the net investment income
generated by a Portfolio over a specified thirty-day period according to the
following formula:
YIELD = 2[( a-b +1)(6)-1]
---
cd
For purposes of this formula: "a" is dividends and interest
earned during the period; "b" is expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Each Portfolio's 30-day annualized current yield as of
December 31, 1998 was as follows (figures calculated without the waiver of fees
by a Portfolio's service provider(s), if any, are noted in italics):
<TABLE>
<CAPTION>
With waivers Without waivers
------------ ---------------
<S> <C> <C>
Fixed Income: 4.63% (1.05%)
Global Fixed Income: 4.71% (0.43%)
</TABLE>
A Portfolio's performance will vary from time to time
depending upon market conditions, the composition of its portfolio and operating
expenses allocable to it. As described above, total return is based on
historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Portfolio's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Performance quotations for the Portfolios include the
effect of deducting each Portfolio's expenses, but may not include charges and
expenses attributable to any particular Variable Contract or Plan, which would
reduce the returns described in this section.
Each Portfolio may compare its performance with (i) that of
other mutual funds with similar investment objectives and policies, which may be
based on the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds; (ii) in the
case of the Fixed Income Portfolio, with the Lehman Intermediate
Government/Corporate Bond Index (an unmanaged index of government and corporate
bonds calculated by Lehman Brothers); and in the case of the Global Fixed Income
Portfolio, with the Salomon Brothers World Government Bond Index (a hedged,
market-capitalization weighted index designed to track major government debt
markets), Lehman
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<PAGE> 99
Brothers Aggregate Index and the Lipper World Income Average (an average of
funds that invest primarily in non-U.S. dollar and U.S. dollar debt
instruments); or (iii) other appropriate indexes of investment securities or
with data developed by Warburg derived from such indexes. A Portfolio may also
include evaluations of the Portfolio published by nationally recognized ranking
services and by financial publications such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Portfolio Magazine, SmartMoney, The
Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various time periods. In addition, each
Portfolio may from time to time compare its expense ratio to that of investment
companies with similar objectives and policies, based on data generated by
Lipper Analytical Services, Inc. or similar investment services that monitor
mutual funds.
In reports or other communications to investors or in
advertising, each Portfolio may also describe the general biography or work
experience of the portfolio managers of the Portfolio and may include quotations
attributable to the portfolio managers describing approaches taken in managing
the Portfolio's investments, research methodology underlying stock selection or
the Portfolio's investment objective. In addition, a Portfolio and its portfolio
managers may render periodic updates of Portfolio activity, which may include a
discussion of significant portfolio holdings; analysis of holdings by industry,
country, credit quality and other characteristics; and comparison and analysis
of the Portfolio with respect to relevant market industry benchmarks. Each
Portfolio may also discuss measures of risk, the continuum of risk and return
relating to different investments and the potential impact of foreign stocks on
a portfolio otherwise composed of domestic securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for the Trust. The financial statements that are incorporated by
reference in this Statement of Additional Information have been audited by PwC,
whose report thereon appears elsewhere herein and have been included herein in
reliance upon the report of such firm of independent accountants given upon
their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Trust as
well as counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
The Trust's audited Annual Report dated December 31, 1998,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference with respect to
all information regarding the Portfolios included therein. The Trust will
furnish without charge a copy of its Annual Report upon request by calling the
Trust at 1-800-222-8977.
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MISCELLANEOUS
As of March 30, 1999, the following persons owned of record 5%
or more of each Portfolio's outstanding shares:
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO
<S> <C>
United Life & Annuity 77.80%
Separate Account One
c/o Marketing One Inc.
Attn: Ron Hyde
851 SW Sixth Avenue
Portland, OR 97204
Warburg Pincus Asset Mgmt 22.20%
Attn: Stephen Distler
466 Lexington Ave., 10th Floor
New York, NY 10017-3140
</TABLE>
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME PORTFOLIO
<S> <C>
Warburg Pincus Asset Mgmt 100.00%
Attn: Stephen Distler
466 Lexington Ave., 10th Floor
New York, NY 10017-3140
</TABLE>
-54-
<PAGE> 101
APPENDIX
DESCRIPTION OF RATINGS
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher-rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal.
<PAGE> 102
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may
<PAGE> 103
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B". The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
<PAGE> 104
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
Commercial Paper Ratings
The following summarizes the two highest ratings for
commercial paper used by S&P and Moody's, respectively:
Commercial paper rated A-1 by S&P's indicates that the degree
of safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
designation. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1 (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have
<PAGE> 105
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the highest four municipal ratings
used by Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is
<PAGE> 106
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated as are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols Aa1, A1, Baa1, Ba1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
<PAGE> 1
PART C
OTHER INFORMATION
WARBURG, PINCUS TRUST II
Item 23. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
a(1) Agreement and Declaration of Trust.(1)
b(1) By-Laws.(1)
(2) Amendment to By-Laws.(2)
c Form of Share Certificates.(3)
d Investment Advisory Agreements.(3)
e Form of Distribution Agreement.(3)
f Not applicable.
g(1) Form of Custodian Services Agreement with PFPC Trust
Company.(4)
(2) Form of Custodian Agreement between State Street
Bank and Trust Company and the Trust.(3)
(3) Form of Sub-Custodian Services Agreement with PFPC
Trust Company and PNC Bank, National Association.(4)
h(1) Form of Transfer Agency Agreement.(3)
</TABLE>
- --------
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on January 2, 1997 (Securities Act File No. 333-19175).
(2) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit to
Post-Effective Amendment No. 19 to the Registration Statement on Form
N-1A of Warburg, Pincus Capital Appreciation Fund filed on February 23,
1998 (Securities Act File No. 33-12344; Investment Company Act File No.
811-5041).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed on March 17,
1997 (Securities Act File No. 333-19175).
(4) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit to Post-
Effective No. 10 to the Registration Statement on Form N-1A of Warburg,
Pincus Trust filed on April 16, 1999 (Securities Act File No. 33-58125;
Investment Company Act File No. 811-07261).
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C>
(2) Form of Co-Administration Agreement between
Counsellors Funds Service and the Trust.(3)
(3) Form of Co-Administration Agreement between PFPC
Inc. and the Trust.(3)
(4) Form of Participation Agreement.(3)
i(a) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Trust.
j Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
k Not applicable.
l Form of Purchase Agreement.(3)
m Not applicable.
n Financial Data Schedules.
o Not applicable.
</TABLE>
Item 24. Persons Controlled by or Under Common Control with Registrant
From time to time, Warburg Pincus Asset Management, Inc.
("Warburg"), may be deemed to control the Trust and other registered investment
companies it advises through its beneficial ownership of more than 25% of the
relevant fund's shares on behalf of discretionary advisory clients. Warburg has
seven wholly-owned subsidiaries: Counsellors Securities Inc., a New York
corporation; Counsellors Funds Service, Inc., a Delaware corporation;
Counsellors Agency Inc., a New York corporation; Warburg, Pincus Investments
International (Bermuda), Ltd., a Bermuda corporation; Warburg, Pincus Asset
Management, International, Inc., a Delaware corporation; Warburg Pincus Asset
Management (Japan), Inc., a Japanese corporation; and Warburg Pincus Asset
Management (Dublin) Limited, an Irish corporation.
Item 25. Indemnification
Registrant and officers and directors of Warburg, Counsellors
Securities Inc. ("Counsellors Securities") and Registrant are covered by
insurance policies indemnifying them for liability incurred in connection with
the operation of Registrant. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Trust's initial Registration Statement on
Form N-1A filed on January 2, 1997.
Item 26. Business and Other Connections of
Investment Adviser
<PAGE> 3
Warburg, a wholly owned subsidiary of Warburg, Pincus Asset
Management Holdings, Inc., acts as investment adviser to Registrant. Warburg
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 26 of officers and directors of Warburg,
together with information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by Warburg (SEC File No.
801-07321).
Item 27. Principal Underwriter
(a) Counsellors Securities will act as distributor for
Registrant, as well as for Warburg Pincus Balanced Fund; Warburg Pincus Capital
Appreciation Fund; Warburg Pincus Cash Reserve Fund; Warburg Pincus Central &
Eastern Europe Fund; Warburg Pincus Emerging Growth Fund; Warburg Pincus
Emerging Markets Fund; Warburg Pincus Emerging Markets II Fund; Warburg Pincus
European Equity Fund; Warburg Pincus Fixed Income Fund; Warburg Pincus Global
Fixed Income Fund; Warburg Pincus Global Post-Venture Capital Fund; Warburg
Pincus Global Telecommunications Fund; Warburg Pincus Growth & Income Fund;
Warburg Pincus Health Sciences Fund; Warburg Pincus High Yield Fund; Warburg
Pincus Institutional Fund; Warburg Pincus Intermediate Maturity Government Fund;
Warburg Pincus International Equity Fund; Warburg Pincus International Growth
Fund; Warburg Pincus International Small Company Fund; Warburg Pincus Japan
Small Company Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus Long-Short
Equity Fund; Warburg Pincus Long-Short Market Neutral Fund; Warburg Pincus Major
Foreign Markets Fund; Warburg Pincus Municipal Bond Fund; Warburg Pincus New
York Intermediate Municipal Fund; Warburg Pincus New York Tax Exempt Fund;
Warburg Pincus Post-Venture Capital Fund; Warburg Pincus Select Economic Value
Equity Fund; Warburg Pincus Small Company Growth Fund; Warburg Pincus Small
Company Value Fund; Warburg Pincus Strategic Global Fixed Income Fund; Warburg
Pincus Trust; Warburg Pincus U.S. Core Equity Fund; Warburg Pincus U.S. Core
Fixed Income Fund; Warburg Pincus WorldPerks Money Market Fund; and Warburg
Pincus WorldPerks Tax Free Money Market Fund.
(b) For information relating to each director and officer of
Counsellors Securities, reference is made to Form BD (SEC File No. 15-654) filed
by Counsellors Securities under the Securities Exchange Act of 1934.
(c) None.
Item 28. Location of Accounts and Records
(1) Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
(Registrant's Agreement and Declaration of Trust,
By-laws and minute books)
<PAGE> 4
(2) Warburg Pincus Asset Management, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as investment
adviser)
(3) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-
administrator)
(4) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as co-
administrator)
(5) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian,
shareholder servicing agent, transfer agent and
dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as shareholder
servicing agent, transfer agent and dividend
disbursing agent)
(8) PFPC Trust Company
Mutual Fund Custody Services
200 Stevens Drive
Suite 440
Lester, Pennsylvania 19113
(records relating to its functions as custodian)
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York and the State of New York, on the 28th day of April, 1999.
WARBURG, PINCUS TRUST II
By:/s/Eugene L. Podsiadlo
----------------------------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act, this Amendment has
been signed below by the following persons in the capacities and on the date
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/John L. Furth Chairman of the April 28, 1999
- ---------------------------------- Board of Trustees
John L. Furth
/s/Eugene L. Podsiadlo President April 28, 1999
- ----------------------------------
Eugene L. Podsiadlo
/s/Howard Conroy Vice President and April 28, 1999
- ---------------------------------- Chief Financial
Howard Conroy Officer
/s/Daniel S. Madden Treasurer and April 28, 1999
- ---------------------------------- Chief Accounting
Daniel S. Madden Officer
/s/Richard N. Cooper Trustee April 28, 1999
- ----------------------------------
Richard N. Cooper
/s/Jack W. Fritz Trustee April 28, 1999
- ----------------------------------
Jack W. Fritz
/s/Jeffrey E. Garten Trustee April 28, 1999
- ----------------------------------
Jeffrey E. Garten
/s/Thomas A. Melfe Trustee April 28, 1999
- ----------------------------------
Thomas A. Melfe
/s/Arnold M. Reichman Trustee April 28, 1999
- ----------------------------------
Arnold M. Reichman
/s/Alexander B. Trowbridge Trustee April 28, 1999
- ----------------------------------
Alexander B. Trowbridge
</TABLE>
<PAGE> 6
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
i(a) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Trust.
j Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
n Financial Data Schedules.
</TABLE>
<PAGE> 7
April 28, 1999
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
Re: Post-Effective Amendment No. 4 to Registration Statement
(Securities Act File No. 333-19175; Investment Company Act
File No. 811-07999) (the "Registration Statement")
Ladies and Gentlemen:
You have requested us, as counsel to Warburg, Pincus Trust II (the "Trust"), a
business trust organized under the laws of the Commonwealth of Massachusetts, to
furnish you with this opinion in connection with the Trust's filing of
Post-Effective Amendment No. 4 to its Registration Statement on Form N-1A (the
"Amendment").
We have examined copies of the Trust's Declaration of Trust, (the
"Declaration"), the Trust's By-Laws, as amended (the "By-Laws"), and the
Amendment. We have also examined such other records, documents, papers, statutes
and authorities as we have deemed necessary to form a basis for the opinion
hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us. As to various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Trust and
others.
Based upon the foregoing, we are of the opinion that the Shares, when duly sold,
issued and paid for in accordance with the terms of the Declaration, the Trust's
By-Laws and the Prospectuses and Statement of Additional Information ("SAI")
included as part of the Amendment, will be validly issued and will be fully paid
and non-assessable shares of beneficial interest of the Trust, except that, as
set forth in the Amendment, shareholders of the Trust may under certain
circumstances be held personally liable for its obligations.
We hereby consent to the filing of this opinion as an exhibit to the Amendment,
to the reference to our name under the heading "Independent Accountants and
Counsel" in the "SAI" included as part of the Amendment, and to the filing of
this opinion as an
<PAGE> 8
Warburg, Pincus Trust II
April , 1999
Page 2
exhibit to any application made by or on behalf of the Trust or any distributor
or dealer in connection with the registration or qualification of the Trust or
the Shares under the securities laws of any state or other jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions.
Very truly yours,
/s/Willkie Farr & Gallagher
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 4 to the Registration Statement under the Securities Act of 1933
on Form N-1A (File No. 333-19175) of our report dated February 5, 1999 on our
audit of the financial statements and financial highlights of Warburg Pincus
Trust II, which report is included in the Annual Report to Shareholders for the
year ended December 31, 1998. We also consent to the references to our Firm
under the heading "Financial Highlights" in the Prospectus and "Independent
Accountants and Counsel" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
April 27, 1999
2400 Eleven Penn Center
Philadelphia, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001029879
<NAME> WARBURG, PINCUS TRUST II
<SERIES>
<NUMBER> 01
<NAME> FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 2,765,921
<INVESTMENTS-AT-VALUE> 2,776,889
<RECEIVABLES> 54,088
<ASSETS-OTHER> 7,834
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,838,811
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,615
<TOTAL-LIABILITIES> 11,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,815,817
<SHARES-COMMON-STOCK> 273,876
<SHARES-COMMON-PRIOR> 60,114
<ACCUMULATED-NII-CURRENT> 423
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,967
<NET-ASSETS> 2,827,196
<DIVIDEND-INCOME> 1,237
<INTEREST-INCOME> 73,904
<OTHER-INCOME> 0
<EXPENSES-NET> (13,106)
<NET-INVESTMENT-INCOME> 62,035
<REALIZED-GAINS-CURRENT> 46,770
<APPREC-INCREASE-CURRENT> (4,228)
<NET-CHANGE-FROM-OPS> 104,577
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (71,877)
<DISTRIBUTIONS-OF-GAINS> (46,789)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,910,106
<NUMBER-OF-SHARES-REDEEMED> (1,786,826)
<SHARES-REINVESTED> 118,666
<NET-CHANGE-IN-ASSETS> 2,227,857
<ACCUMULATED-NII-PRIOR> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001029879
<NAME> WARBURG, PINCUS TRUST II
<SERIES>
<NUMBER> 02
<NAME> GLOBAL FIXED INCOME PORTFOLIO
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
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</TABLE>
